UK and US stock markets have fallen sharply over the last month. Today I want to explain the steps I’m taking to protect my investments in these uncertain market conditions.
As a long-term investor, my top priority is to protect my capital from permanent losses. Market volatility is a fact of life, but if I’m invested in good businesses then I can afford to be relaxed about falling share prices. Over time, I expect my businesses to become more valuable, driving their share prices higher.
#1: focus on what matters
The first thing I do to protect my investments when markets are falling is to protect myself from the risk of making bad decisions.
If I tried to follow every bit of market news and every share price movement, I’d be a nervous wreck. I’d probably start to make bad decisions, abandoning my investment process and giving way to emotional thinking.
To protect against these risks, I ignore most market news. I don’t check the share prices in my portfolio every day. I don’t bother too much about what the FTSE 100, S&P 500 or Nasdaq indices are doing.
The only news items I do follow closely are trading updates and financial results from the companies where I’m invested. Doing this helps me to stay focused on the real performance of my portfolio.
#2: do (almost) nothing
From what I can tell, there’s a good chance that the UK and some other major economies are heading for a recession. Naturally, this is uncertain. But if it happens, it will probably affect some of the companies I own.
Some of my shares will probably report slower growth, or even a fall in profits. If that happens, what I’ll do is to take a fresh look at the business.
How is the company handling tougher markets? Are its finances still strong? Can profits bounce back quickly?
Most importantly, does my long-term investment story for the business still make sense?
If the answers to these questions are mostly positive, then I’ll keep holding. The only thing that makes me sell a share is if I think the story has changed — or if I realise I may have made a mistake with my original investment.
#3: keep buying
One of Warren Buffett’s best-known quotes relates to buying shares during market crash:
“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”
Stock market history tells us that the majority of share price gains take place on a small number of days each year. I don’t want to miss out on these gains by sitting on the sidelines in cash.
If I feel that shares are offering good value and may be cheap on a long-term view, then I’ll buy, regardless of what the market is doing.
This is the approach I took when the market crashed in 2020, and it worked very well.
I don’t expect another crash like 2020 in 2022. But whatever happens, I’m going to take the same approach. Keep calm. Stay focused. And carry on investing.