The FTSE 100 has plunged in value during the past few weeks. The severity of the decline has caught many investors off guard. Indeed, since 21 February, the UK’s leading blue-chip index has lost nearly 1,000 points. That works out as a 12% decline, at the time of writing.
Investors have been dumping shares at the fastest pace since the financial crisis. And it doesn’t look as if this pullback is going to come to an end any time soon.
Heavy selling
Investors and traders have been dumping the FTSE 100 on fears the COVID-19 outbreak could become a global pandemic. If it does, it’s impossible to tell, at this stage, what the impact will be on the worldwide economy.
Airlines and travel companies are particularly exposed. Travel bans are already causing billions of pounds of losses at these businesses. If the crisis becomes really bad, there could be a wave of corporate bankruptcies. That could set off the kind of financial crisis that gripped the world 11 years ago.
In this environment, it’s easy to panic and sell your investments. But panicking is never a sensible investment strategy. Instead, now could be the time to buy.
Time to buy
There’s no denying that, in the worst-case scenario, the market could fall much further from current levels. However, it’s impossible to predict (at this stage) how bad the COVID-19 outbreak will become, and what impact it will have on the global economy.
Furthermore, it’s going to be impossible for investors to pick the bottom for stocks. The market could make a comeback today, tomorrow, next week, or next month.
As such, the best strategy for this environment is to keep calm and carry on investing. Buying high-quality companies at attractive prices is always going to be the best investment strategy, even in situations like the one we’re in now.
While these companies might face short-term headwinds, they should continue to prosper over the long run.
A lesson from history
Looking back at the performance of stocks after the financial crisis is a good way to see the power of long-term investing. Over the past decade, the FTSE 250 has returned 10% per annum. That suggests every £1,000 invested 10 years ago would be worth £2,700 today — even after recent declines.
Before recent declines, the market had returned 12% per annum. That would have turned £1,000 into £3,300. Therefore, the best strategy for the current market could be to increase your exposure to stocks if you have the money on hand. If you invest with a long-term horizon, as the example above shows, the result should be favourable.
The market might decline further in the near term, but the global economy always emerges stronger from an economic crisis. It’s highly likely this trend will continue for the next few decades at least.
That’s why now could be the time to increase your position in the market.