It seemed timely that I recently read another excellent article by Bruce Jackson (formerly of the Motley Fool but now from The Capital Club) in relation to falling and volatile stock markets. This article was written on October 12 2018.
In the last few weeks, world markets have experienced some wild swings which naturally tests the patience and emotions of investors. Even though you will feel like selling everything to protect the rest of your assets, this is normally not the right move.
Here are some of the tips provided by Bruce Jackson to help deal with this volatility.
Hype versus reality
Most shares have recently seen marked declines from their recent highs. Two-thirds of stocks in the S&P500 have fallen at least 10 percent from these highs and 3 in 10 have posted at least a 20% drop – which then starts the “bear market” commentary.
News sources tend to pump up investor panic with these statistics. But the reality isn’t nearly as dire, as long as you can get past the immediate pain of a big one-day drop in the market and stay focused on your long-term strategic plan to build wealth.
This is not a stock market crash
A “points” based decline can be very misleading, due to the fact markets have climbed so high over the last decade.
In 1987, the Dow Jones’ 500 point drop represented a market fall of 23 per cent in a single day. Now a 500 point drop, even though sounds savage, is about a 3 per cent decline. Focus on percentages rather than points and you can assess market moves so much more rationally!
These drops didn’t put a big dent in stock market gains
Given the way many commentators talked about the decline, many thought their portfolios had been crushed. Yet even after an 832 point drop, the Dow Jones’ was still up 880 points on the year. In Australia, the news isn’t as good as the S&P/ASX200 is down around 3% so far in 2018.
Holders in particular stocks such as Commonwealth Bank, Westpac, Telstra and Ramsay Healthcare will be licking their wounds, given their double digit falls so far in 2018.
There has been a shift in the past 12 months into growth stocks, with ASX tech stocks becoming increasingly popular with many investors and fund managers.
Although Afterpay Touch (APT) and Appen Limited (APX) copped massive single day falls recently, they are still up 150% and 45% for the 2018 year! If you had decided never to invest in these two stocks because you feared suffering big declines, you would indeed have avoided these downturns – but you never would have achieved these huge returns either.
In time, you’ll forget about market drops
It’s hard to believe when the share market seems to be in free fall that you won’t always remember the pain that the drop caused. But the share market has always bounced back from adversity and smart investors take faith from that past experience and use it to make what seem to be bold moves.
You don’t even have to go back that far to see a great example of this.
In February this year, the Dow suffered not one but two declines of more than 1,000 points in short succession. Those drops were part of a broader market correction that eventually sent the market down roughly 12 per cent in less than a month. Yet in less than eight months, the Dow recovered those losses and reached new all-time highs. In hindsight, what seemed like gargantuan plunges marked only a brief pause in the bull market.
Channel your inner greed
One of Warren Buffett’s most famous quotes advises investors to “be fearful when others are greedy, and greedy when others are fearful.” Big market drops are the best time to follow the “Oracle of Omaha’s” advice by looking more closely at stocks that have suddenly gotten a lot cheaper to buy.
Build yourself a stock watch list for situations like this.
It’s tough to be unemotional in evaluating stocks after a big market drop, because short-term fears about a company’s immediate future are hard to ignore. But if you’ve already researched a company and put it on your watch list, then it’s a lot easier to make the rational decision to add shares when a bargain opportunity presents itself.
Stay calm and prosper
It’s always tempting after a big drop in the stock market to take your profits and run.
The smarter, time-tested move, though, is to stick with your long-term investing plan — and for the best investors, that often means looking for attractive opportunities to buy promising stocks at cheaper prices.
It is so important to keep your nerve, when everyone else is losing theirs!