Few people like seeing their wealth go down, even when it’s just numbers on a screen. Prepare yourself mentally, however, and you can learn to take sell-offs such as the one we experienced last week in your stride. You might even grow to like them!
Here’s a few things to remember over the next few weeks and, quite possibly, months.
Crashes are common
Big market falls happen more often than you might think and yet this fact isn’t being mentioned much by the media as it focuses on the financial impact of the coronavirus. From May 2015 to February 2016, for example, the FTSE 100 lost around 20% of its value. Between May 2018 and October 2018, the index fell again, by 14%.
In addition to being far from rare, corrections tend not to last all that long, at least relative to the bull markets. In the two examples mentioned above (picked for being the most recent), things bounced back within a few months. Sure, it’s possible we could see a repeat of the Great Recession as supply lines are disrupted and businesses suffer. The end of the world as we know it? Probably not.
You’re in control
The list of advantages that private investors have over the professionals is usually regarded as very small.
There is, however, one thing that all Fools should appreciate: their freedom to buy and sell when they please. Contrast this with money managers whose careers depend on them being seen to be taking action on behalf of their clients. Heavily-leveraged short-term traders may also need to close positions before losing their shirts, incurring costs in the process.
If you don’t wish to sell a holding but hate seeing it fall in value, the solution is simple: turn off your laptop and delete broker apps from your phone. History shows that taking a long-term view has always been a winning strategy.
A reality check
It’s easy to become complacent about investing when most, if not all, of your stocks are rising and your wealth is steadily increasing. A bout of market volatility, however, can be a useful reality check.
Falling prices help investors discover who they really are. Do you really intend to hold for a long time? Were you buying in the expectation that a share price would rise and not because the underlying business is worth owning? Should you be allocating your money more cautiously and investing in, say, bonds and property?
If you’ve found the last week unbearable, it’s likely you’ve misjudged your own risk tolerance. While you can’t turn back the clock, you can make the necessary adjustments as and when a recovery sets in.
Stocks on sale
A final reason to embrace market falls is that it gives those with cash a chance to buy quality stocks at lower prices. That may sound obvious, but it’s easily forgotten as people relentlessly ruminate over where markets might go next.
I don’t know whether the coronavirus will bring forth the next bear market or whether it will be overcome within a few months and forgotten about (just like all the other events that haven’t stopped stocks from increasing in value over the last few years). What I do know is that capital risk is reduced when share prices are lower. This is an opportunity you might not want to miss.
