The last month has been tough for investors as global stock markets have fallen sharply. In the UK, the FTSE 100 index is down more than 8% since late September with plenty of well-known stocks having fallen significantly more than that.
At times like this, investing can be challenging. You check your portfolio, and all your holdings are down. You open a newspaper and the headlines read something along the lines of “Billions wiped off the FTSE 100.” And then you get the ‘perma-bears’ – the analysts who have been talking up a financial apocalypse for years – proclaiming that they were right all along and that the world is ending.
So, now what? What should investors be doing with the FTSE 100 falling sharply?
We’ve seen it all before
The first thing to understand is that we’ve seen this kind of market volatility before. And we’ll see it again. It’s what markets do. Over and over again. Essentially, there are two main scenarios.
Most of the time, stock market wobbles are a temporary thing. Investors work themselves into a frenzy over particular economic issues, yet after a short while, markets shake off the panic and resume their upward trends. We saw this after the Brexit vote. On average, you can expect a fall of 10% or so every 12-18 months.
On the other hand, occasionally – and this is a much more infrequent event – jitters do result in further falls and markets experience a full-on crash. This happened a decade ago during the Global Financial Crisis and in the early 2000s after the dotcom boom.
The question people are asking right now is this: is the current market turbulence a minor blip or is it likely to result in a full-scale market meltdown?
The power of profits
Unfortunately, I don’t have an answer to this question. No one does. The market could keep falling in the short term or it could bounce.
However, what I do know is that the power of democratic capitalism is an amazing thing and that if you’re willing to invest your money into stocks over the long term, it’s possible to create life-changing wealth, as stock markets tend to produce returns of 8%-10% per year, on average, over the long run.
Just ask Warren Buffett, who earlier this year pointed out that had you invested $10,000 in the US stock market on the day he made his first stock purchase in 1942, your investment would have grown to over $50m by May this year.
The stock market has always had its ups and downs. The key is not to be panicked out of the market when investing makes you feel uncomfortable.
What to do now
The way I see it, the key things to do right now are:
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Stay calm. Realise that this volatility is likely to pass eventually.
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Stop checking your portfolio. Focusing on your losses won’t help. Take your mind off the market.
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Reframe your mindset. Instead of thinking about stock prices falling, see opportunities to buy high-quality companies at lower prices. Buying low and selling high is the key to making a profit.
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Be patient. Investing is, and always has been, a long-term game.
Investing can be challenging at times, no doubt. Stick to your investment strategy over the long term though, and history suggests you’re likely to be rewarded.