What investors should and shouldn’t do during a market sell-off.
Why seasoned investors see market falls as an investing opportunity.
After a seemingly longish bull run, it seems like volatility has returned to markets. The start of the week saw stock markets plummeting, as fears of a potential recession in the US grew. This was due to data showing weaker than expected jobs and manufacturing figures in the US, with many pundits expressing concern that the Federal Reserve has left it too late to begin cutting interest rates without damaging the world’s largest economy.
This negative sentiment affected other markets, with Tokyo’s Nikkei 225 index closing down 12.4%, its worst percentage fall since Black Monday back in October 1987.
The falls elsewhere were less dramatic – the Dow 2.6%, the Nasdaq 3.4% and 2% in the UK – but they were still painful for investors, even if they put this week’s dip more in the category of a minor bump than a major crash. Prices have bounced back somewhat as the week has progressed but there remains a nervous feeling to markets and more volatility could be expected.
Watching your portfolio fall is always unnerving and some are tempted into a kneejerk reaction to sell to avoid further losses. However, this could be precisely the wrong move to make.
So what can you do to protect your money when market’s fall?
Take a long-term perspective
It has often been said that investing is a medium to long-term commitment – that means at least 3-5 years. Over this period, your investments will inevitably experience volatility, with your holdings going down and up along the way.
The key for investors is not to panic when these falls occur. Stock markets rise and fall for all sorts of reasons – interest rate movements, geopolitical changes, company announcements etc. And while these movements might make you feel uncomfortable, they’re part and parcel of investing.
Investors should also view these short-term losses in the context of the gains that you have made recently. Performance will be specific to each investor’s portfolio but, for example, a fund tracking global indices will have returned slightly more than 12% over the past year, even after the falls we’ve seen. Investing involves ups and downs – you don’t get one without the other.
Stay invested
If you have a reasonable time horizon and a well-diversified portfolio, the last thing you should do when markets fall is to panic sell with the herd. Making rash decisions and acting in the moment could lock in any losses and impact any potential future gains.
A more patient buy-and-hold approach is usually the best option. Short-term losses are part of investing and cannot be avoided completely – it’s how you handle them that counts.
If you are concerned, here are some steps to take.
- Review your investment strategy – if it’s still in line with your goals and objectives, you should probably stick with it. Only change it if your priorities and goals have changed.
- Check that your portfolio’s well balanced – having a well-diversified portfolio can help to minimise risk during periods of volatility.
- Assess your risk tolerance – if increased volatility unnerves you, review the level of risk you’re taking.
Any decision you make should fit in with your long-term strategy and goals, not just deal with an emotional short-term response. Seasoned investors tune out of the short-term noise and focus on their long-term investment goals. Unless you need your money right away, you should allow your investments time to recover, which history suggests they will, as this data on the FTSE 100 indicates.
Buy more
Seasoned investors often see market falls as a reason to invest more, not less, and may look to ‘buy the dip.’ If you have cash you are looking to invest, this could be the time to do it.
By investing when prices are falling, investors can improve their long-term outcomes because by buying assets at lower prices, they have more assets to benefit from when prices recover.
It can pay to spread buying new assets over time to average out the price you pay, because timing the bottom of a crash is as difficult as timing the start.
The next step
In summary, history has shown us that volatile moments tend to calm and lead to further gains. Conversely, making changes during volatile times can prove costly.
Investing is for the long-term and market falls will happen along the way. Volatility is part and parcel of the investing process, and the key for long-term investors is to hold a diversified portfolio appropriately positioned to achieve your long-term objectives.
However, if you currently have any specific concerns, or would like some financial advice on the current situation, please do not hesitate to contact us.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.