What to do when the FTSE 100 is plummeting

The FTSE 100 (INDEXFTSE: UKX) index has fallen 8% in just weeks. Here’s what to do.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

After a lengthy stretch of calm, stock market volatility has returned with a vengeance. On Monday, the Dow Jones index fell a whopping 1,175 points, the single largest one-day drop in history. At one stage in the day, it was down 1,600 points. UK stocks haven’t escaped the carnage. The FTSE 100 has plummeted sharply over the last week, with six consecutive days of falls. The index is now down around 8% from its mid-January all-time high.

When markets are in freefall mode like this, it can be scary. Especially if you’re new to investing. The media doesn’t help. Newspapers and websites tend to dramatise any volatility, exclaiming that £Xbn has been wiped off the market and that investors will suffer.

So what’s the best strategy to deal with such volatility?

Stay calm

The first thing to do when stocks are falling is to stay calm and rational. Breathe. Remember that markets rise and fall. They always have and they always will. It’s part of investing.

Also, put any falls into perspective. For example, over the last two years, the FTSE 100 has risen over 20%. Add in dividends and investors have enjoyed a near-30% return. So an 8% fall is not the end of the world.

Ask why

Next, it’s also worth finding out why markets are falling. This can help you stay rational. 

In this case, the main driver of the volatility, in an ironic twist, is that economic news from the US has been stronger than anticipated. As a result, the market is expecting multiple US interest rate increases this year. That doesn’t seem like the end of the world to me.

Embrace the volatility

Be fearful when others are greedy and greedy when others are fearful,” Warren Buffett famously said. If you’re a long-term investor, like myself, follow Buffett’s advice and embrace the market volatility.

Many investors hate volatility. They panic when stocks fall, and sell up, often locking-in losses. But I love volatility. I’ve been waiting for a correction like this for a while now and I’m excited that one is finally here. Why?

Because corrections bring opportunities. When stocks fall sharply, you have the opportunity to buy high-quality companies at lower valuations. That means potentially higher profits for you in the future. Similarly, if you’re a dividend investor, falling share prices bring opportunities to pick up higher yields. That means larger dividends for you in the future. When you reframe it that way, volatility isn’t so scary.

What I do when markets are falling is draw up a ‘best ideas’ list. I make a list of the five to 10 stocks that I really want to add to my portfolio. Often, these stocks are popular companies that regularly trade at high valuations, such as Unilever and Diageo. Then, as the market falls, I monitor them for attractive entry points. It can take courage to buy when the market is falling, but over the long term, the rewards are worth it.

Of course, global markets could fall further. The FTSE 100 is up today, but it may continue falling in the near term. With that in mind, a sensible strategy is to drip feed capital into the market, bit by bit. Don’t go ‘all in’ at once.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon owns shares in Unilever and Diageo. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »