Yesterday, the FTSE 100 fell by 150 points to 5958. This means that it has now dropped by almost 1150 points since its peak of 7100 earlier this year, which is a decline of over 16% in less than six months.
Clearly, the outlook for the global economy and the FTSE 100 have changed significantly since April and, while the index has not technically entered a bear market (since it has not fallen by 20% since its peak), there is a very good chance that it could do so in the near term.
And, while bear markets are undoubtedly an unpleasant experience in the short run, all investors can get through them and emerge in a stronger position. Here’s how.
Ignore Hysteria
When the stock market rises by a significant amount, it often fails to make the headlines. However, if the FTSE 100 falls by 100+ points, it is usually given a primetime slot on the evening news and splashed across the front pages of various newspapers. Figures in the £billions are given for how much the value of UK plc has fallen and various commentators usually paint a rather desperate picture of the outlook.
While interesting, such coverage is mostly unhelpful for investors. It tends to cause fear and panic, both of which can cloud judgement and cause rash decisions to be made. While easier said than done, avoiding such a state makes it far easier to cope with a bear market which, undoubtedly, is part of the fabric of investing. In other words, every so often share prices fall quickly and by a large amount. By accepting this fact it makes it far easier to ignore the hype.
Think Long Term
In the next few weeks and months, the FTSE 100 could fall to 5500 points or even 5000 points. Similarly, it could rise to 6500 points or 7000 points. Nobody, though, can accurately predict which scenario will occur and so it makes little sense to try and second guess short term, random movements.
Instead, it is helpful to remember that stocks are slices of real businesses – many of which have been in existence for decades. As such, a fall in their share price over a period of a few months is akin to a drop in the ocean in the grand scale of things. And, while we would all love to double our money within a week, the reality is that businesses move slowly and by investing now it is possible to generate excellent returns in the coming years.
Thinking long term not only helps to keep panic at bay, it also allows the mind to spot long term opportunities to profit from discounted share prices.
Buy, Buy, Buy
The time to buy any asset is when its price is low, just as the time to sell is when its price is high. However, prices do not become low without good reason, so a bear market is a perfect opportunity to buy high quality companies at lower prices.
The problem, though, is that many investors fail to sniff out an opportunity. They either wait for a lower price or else become paralysed by fear. Certainly, buying now may not look like a good move for the next few weeks or months, but it will probably appear to be a great move in five years’ time.
As such, buying during a bear market at prices which offer a wide margin of safety appears to be a sound choice. And, while it may not feel right, it is probably the most logical moment to buy for long term investors.
