On Monday, the FTSE 100 fell by over 3%, which is a big drop. Fears around a second lockdown drove share selling. With the effects of Covid-19 likely to be with us for another six months and the stock market likely to be volatile, perhaps even leading to a second stock market crash, here’s what I plan to do if share prices tumble.
Don’t try to predict the future in a stock market crash
The most important thing to do, I think, when markets fall heavily as they did this week is to relax. Trying to predict the future is difficult as bookmakers and gamblers can tell you. Avoid taking any action that’s excessive and trying to time the market. Research shows this can hit your returns as an investor, hard.
There’s little point selling shares once a market sell-off has begun. The stock market crash from March this year shows a recovery always follows a decline. So sit tight and hold on to shares that are profitable. If you hold shares you believe in, when markets get volatile, doing nothing (especially if you invest for the long term) is likely the best option.
Keep a watchlist of shares to invest in
You can be more proactive in researching shares while the markets gyrate. As we can also be confident a recovery will at some point follow a stock market fall, it’s worth spending time creating a list of shares you’d want to invest in and that fit with your investment style.
This is what I did in March with some noticeable successes in the subsequent share price bounce-back that came from April onwards.
Take action when the time is right
Having a watchlist of shares that you want to buy when they’re at a cheaper price will help you take action when the market stops falling. Once you feel sufficiently confident that the worst is over, I think it’s best to start investing in the shares you like. You’ll have to accept it’s unlikely you’ll time this to perfection at the bottom of the market.
That’s why it’s worthwhile spreading out your investments over time. The recovery is often more prolonged than the fall, so you’re unlikely to miss out completely.
Remember, a stock market crash isn’t the end of the world and there’s no need, once it’s started, to sell your investments at a lower price or at a loss (unless of course, you seriously believe they won’t survive in a difficult economic environment). For most investors, I believe that the better course of action (and evidence backs this up) is to remain invested. Then seek to take advantage of the lower prices on offer to buy great companies at a fair price. That’s something Warren Buffett advises doing.
