I hate the word CRASH. But for the purposes of the headline above, let’s call this fall in the stock market a correction. This month, the FTSE 100 share index fell by almost 10%, the US stock markets were all down heavily as was almost every stock market across the world.
The press loved it. Nothing sells papers quicker than alarming and negative headlines. How about this: “Financial Meltdown!” “Billions wiped off shares across the world!” And so on. We see these headlines and our immediate instinct is, “Ooh, I must read about that.” And like sheep, we buy the newspaper.
But what do you do when the stock market drops heavily? How should you react when you go online to look at your ISA or pension statement and its value has fallen by 10% or more? Here are three options:
1: Panic and sell everything immediately…
…or move all your stocks into Cash. As you would imagine, I’m not a great fan of either strategy, but they do have one positive. You won’t lose any more money. If the market continues to fall, you’re safe. There is however one small problem. First of all, can you pull your money out quickly enough before the markets hit the bottom? Even if you manage to do so, when markets crash heavily, they tend to bounce back pretty quickly.
In many instances in the past, the momentum of the bounce back has continued beyond the point of the initial fall. This causes a bull market (an expression used where markets power ahead like a charging bull). Anyone who had sold everything or moved their money into cash would be “outside the market” meaning they would not participate in the bull market, thereby crystallising their losses. By the time they got back in, they would have missed the boat.
2: Keep calm and do nothing….
…leaving everything as is. It might sound lazy but doing this takes some guts and faith that markets will return to normal. History suggests that they usually do. The biggest market corrections have always been followed by a strong rally. Black Monday 1987, the Dot Com Crash in 2000, 11 September 2001 and most recently, the Credit Crunch in 2008.
Markets tend to take weeks to fall and months or years to recover. But by sitting tight, staying calm and doing nothing, you get to participate in the rally as and when it comes. History has shown there to be rally after every market correction there has ever been, however with stocks and shares, there are no guarantees.
3: Buy like it’s going out of style….
…investing any spare cash in the markets. We all understand property. Ask yourself this: When would have been the best time to invest in property? You may think back to 1991, when interest rates were at an all-time high, when almost every house in London was For Sale, when interest rates hit 15%, when words like “negative equity” and “handing back the keys” and “repossessed” was on everyone’s lips. Hindsight is a great thing, but if you’d had the money at the time, and a crystal ball, you would have bought everything you could get your hands on. The stock market is no different.
Most investors tend to get on the bandwagon during a bull market. However, the best time to jump on the bus is after a crash – or should I say market correction? It takes a special type of investor to do that. What type of investor are you?