The stock market has been in meltdown this year, although the FTSE 100 has held relatively firm. While the US S&P 500 is down 25.3% year to date, the UK’s blue-chip index has fallen just 8.25% to 6,893 at time of writing.
As a rule, people learn more when things go wrong than when things are going right. That’s definitely the case when the stock market hits a bump in the road. Here are five investment lessons I’ve learned this year.
1. Stock market fads never last
I’m old enough to resist the temptation to get lured into investment fads and fashions, and watched last year’s meme stock mania from a safe distance. There was no way I was going to chance my arm trading GameStop or AMC Entertainment.
Yet there were still moments when I wondered if I was missing out – especially on the US technology boom. It’s human nature. I resisted buying at the peak of the cycle and I’m glad I did, given subsequent events. Markets can be irrational, but sanity always returns in the end.
2. Investors should always expect a crash
With the stock market, anything can happen. Nobody expected the Covid pandemic to trigger a stock market boom, for example, while Vladimir Putin’s invasion of Ukraine threw stock market forecasts into disarray.
I prepare myself for the turbulence by investing for the long term, by which I mean at least 15 to 20 years. That allows me to pretty much ignore every stock market crash. I simply leave my money invested until markets recover. I also keep a bit of a powder dry, to go shopping for my favourite shares at reduced prices.
3. Investing every month is a comfort
Ages ago I set up a direct debit to invest a regular monthly sum in a blend of shares. Having budgeted for the money to leave my account, I rarely give this a second thought.
As a result, falling shares prices actually work in my favour. That is because my monthly investment picks up more stock at the lower price. It also boosts my odds of buying at the very bottom of the market, if only for one month.
4. Dividend stocks are a joy
Dividend stocks fell out of favour during the tech boom, but I kept the faith. Now my loyalty feels vindicated. I reinvest all my dividends and with share prices down, they’re picking up more stock every month. When markets recover, I’ll reap the benefit. Those dividends will form the bedrock of my retirement income.
5. Diversification is key
I focus most of my investment energies on buying UK shares. I particularly like buying them when markets are down and valuations are low, as they are now. I also have international exposure, through a handful of investment trusts and exchange traded funds (ETFs).
This diversification means that although I’ve been hit by the US bear market, and my Russian fund has collapsed, my overall losses are manageable.
My holdings in UK dividend stocks have helped me sleep comfortably at night. I’m now buying more of them to take advantage of today’s dirt-cheap valuations.