With the tumultuous week the FTSE 100 has had, many have been panicking. But they’re wrong. In fact, the message should not simply be Don’t Panic, but instead Rejoice!
Why so? Well, unless you’re nearing the end of your investment career, when you’re more interested in withdrawing cash to live on (or buy that Ferrari), you’ll still be in the buying stage and you’ll want to be picking up shares as cheaply as you can get them, won’t you?
And now that the FTSE’s down 13% since late April, to around 6,160 (having dipped below 6,000 this week), you’re ignoring all those gloom-mongers who are stupidly selling out of shares they bought earlier at higher prices, and you’re snapping up the bargains, aren’t you?
Aren’t crashes brilliant?
The thing is, a stock market crash is exactly what we should be hoping for when we’re in the process of building up our portfolios, and we’ve been pretty lucky in recent years with the financial crisis coming not long after the dot com crash.
If you’d bought into the FTSE 100 in March 2009 at the worst point in the banking crash (just when all the investment institutions were at their most irrational and selling out), you’d have more than doubled your money by today with dividends included. And any money you invested in the depths of the dot com sell-off in 2003 would again have more than doubled by today, including dividends.
Of course, it’s impossible to time the peaks and troughs of the market, but even if you’re just a regular investor the crashes will work to your advantage. If you’re investing a regular amount every month in FTSE 100 shares, you’ll have picked up quite a few more shares this month than you did in previous months.
Big three going cheap
Take the three biggest companies in the FTSE 100. For every £100 you invest in Royal Dutch Shell today you’d get 5.9 shares, but this time last month you’d only have got 5.7, and back in May you’d have snagged just 5 of them — you can get 18% more shares now than three months ago.
The same goes for HSBC Holdings. Every £100 today would buy 19.5 shares, compared to the mere 16 you’d have had in May (21% more). And for GlaxoSmithKline you’d pick up 7.6 shares, compared to May’s 6.8 (12% more). And as a bonus, you’d be tying in bigger dividend yields simply because the share price has dropped, so your future income stream will be enhanced by the market fall.
Sure, HSBC is directly affected by the problems in China as it does so much of its business there, and Shell is hit by falling oil. But you should be in a nice position when the oil recovery does come (which it surely will), and GlaxoSmithKline is about as immune to regional calamities as you can get. And with a balanced portfolio, these individual risks are averaged out.
And, don’t forget, they’re all exactly the same companies they were a week ago, before the latest panic set in.
Any downside?
Are there any cautions to add to this? Yes, there are. Don’t invest in the Chinese stock market, because it is manipulated to suit the needs of the Chinese government and is not there to provide a free market for investors. And don’t invest in small companies, especially AIM ones, that do the bulk of their business in China, as they are overseen by Chinese regulatory bodies — which are even more incompetent than AIM itself.
But when the UK and US markets fall, just keep on dripping in your investment cash, and you’ll end up wealthier for it.