What a week. At the time of writing on Friday afternoon, the FTSE 100 is down by 12% in just five days. Ouch.
My portfolio has taken a big hit. But situations like this are unavoidable from time to time. I believe that how you handle these events will make a big difference to your stock market profits.
I haven’t sold anything and have been buying shares over the last week. Let me explain why.
1. The world keeps turning
I know a number of investors who have sold their entire portfolios. If you’re thinking about this, I think it’s important to ask yourself why. A lot of damage has already been done. Selling now crystallises those losses — but in a few weeks, shares might have started to rise again.
You may be concerned about suffering a permanent loss of capital. But while I don’t want to be insensitive about a human tragedy, the reality is that the coronavirus outbreak will pass, perhaps within a few months.
Events such as the Lehman Brothers bankruptcy (2008), the dotcom crash (2001) and Black Monday (1987) have always been accompanied by sharp falls. But the market has always recovered. Often quite quickly.
If you’re investing with a long-term view — at least five years — I think it makes sense to ride out the storm.
There are also practical problems with moving in and out of the market.
2. Selling could be very expensive
If you sell all your stocks, you’ll face three big costs. The first is the dealing fees. On a portfolio of 20 stocks, this might be about £200. You might think that’s a small price for safety. Perhaps it is — although you’ll have to pay the same again to buy back your stocks.
The second cost is that you’ll miss out on any dividends paid while you’re out of the market. If you invest in big-cap dividend stocks like I do, this could be 2%-3% of your portfolio over a few months.
Even that might be acceptable. But the biggest cost is the final one. You could miss out on the market recovery.
History suggests that most big market movements take place on just a few days of the year. The FTSE 100 fell by nearly 5% on Friday. It wasn’t fun. But in a few days — or weeks — the market might rise by 5% in one day.
By the time you’ve decided that the worst is over, your stocks might have risen sharply. There’s a real risk you could end up buying back your shares at a higher price than you sold them for. Even with a modestly-sized portfolio, that could cost you thousands.
3. So many bargains…
As a long-term income investor, I can see a lot of great buys at the moment. Good quality companies that are on sale for about 20% less than they were a month ago.
If there was nothing wrong with these companies a month ago, then in my view there’s nothing much wrong with them now. Although the coronavirus might cause a hit to earnings, in my experience, good quality businesses will recover.
Lower share prices mean higher dividend yields. By buying stocks more cheaply now, I expect to benefit from higher yields and bigger capital gains in the years to come. I think Warren Buffett would approve.