It’s fair to say that the FTSE 100 index is having a volatile week. As I write this late on Thursday afternoon the blue-chip index is down more than 1.5%. That’s after it fell more than 2% on Monday.
At times like this, when the whole market is falling, investing can certainly feel challenging, particularly if you’re new to investing. No one likes to see the value of their investments fall. It’s important to remember, however, that stock market volatility is very normal. With that in mind, here’s a look at what I do when the market is down significantly.
Analyse the situation
The first thing I always do when stocks are falling (aside from staying calm, of course) is to find out what’s causing the panic. I find that understanding the situation provides a sense of control.
In this case, the FTSE 100 is down today for a number of reasons including:
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The fact that the Bank of England held interest rates steady at 0.75% today (recent economic data had led to speculation that rates could be cut) which has pushed the pound up. This could translate to lower earnings for FTSE 100 companies that generate revenues internationally (there’s an interesting snippet here on currency movements that I’d recommend reading). The central bank also downgraded its forecasts for UK growth.
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Concern over the impact of the Coronavirus, which appears to be spreading rapidly and certainly adds uncertainty to the global economic outlook.
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A sizeable fall in Royal Dutch Shell’s share price on the back of weak fourth-quarter results. Given that Shell is the largest stock in the index, its share price weakness will have dragged the index down.
Put the falls in context
Next, I put the falls in context. While a fall of 1.5% today and 2%+ on Monday is concerning at face value, let’s not forget that the FTSE 100 index generated a total return of 17.3% last year. When you think about it like that, the current stock market weakness is much easier to digest.
Draw up a wishlist
Finally, I draw up a list of high-quality stocks that I’d like to buy on market weakness. I then monitor these stocks closely, with a view to buying at a bargain price when other investors are panicking. As Warren Buffett says, the key to making money in stocks is to “be greedy when others are fearful.”
Some of the FTSE 100 companies on my wishlist right now include cloud services provider Sage, hotel group Intercontinental Hotels, alcoholic drinks legend Diageo, and joint replacement specialist Smith & Nephew. All of these companies tend to trade at higher valuations because they’re generally viewed as high-quality companies with attractive growth prospects. If I can buy these stocks at a lower valuation during a period of market weakness, I’ll be very happy.
In summary, stock market volatility is very normal. The key is to stay calm, and use the market weakness to your advantage.