These are scary times for investors. Take a look at the FTSE 100 or any other stock market now and only one word comes to mind. Wow (and not in a good way). We’ve not only seen not red across the board, but also some of the largest and heaviest price plunges any of us have experienced in our investing lifetimes.
As markets opened on Monday morning traders struggled to cope with the volume of panic selling.
What happened?
Over the weekend, two major oil exporting economies went to war. Russia denied an OPEC call to cut oil production. Vladimir Putin’s government is under heavy pressure because the country’s public spending is heavily tied to the price of oil. In response, Saudi Arabia threatened to flood the market with 2m more barrels per day at a massively discounted rate. The oil price fell by 25%. That’s its largest one-day drop since the start of the Gulf War in 1991.
When that news hit the market on Monday, already shaken by the spread of the coronavirus, all hell broke loose.
The FTSE 100 fell below 6,000 points for the first time since 2016, plummeting by 8.5%. By the end of the day, £125bn was wiped from the value of the UK’s 100 largest companies.
The Dow Jones Industrial Average, a benchmark of the 30 largest US companies, fell by over 2,000 points to settle 7.5% lower, its largest single-day fall in years.
Trading was suspended on Wall Street after indexes tumbled more than 7%, automatically halting trading for 15 minutes just minutes after the opening bell. For most investors this is uncharted territory.
How to react
When share prices start to rebound, and they will, investors will see that this has been an incredible buying opportunity. Companies you previously thought attractive but unaffordable, perhaps at high P/E ratios, are as cheap as chips. And businesses with strong balance sheets that perhaps paid only a 3% to 4% dividend now pay 5% or 6%. As share prices fall, dividend yields rise.
But I’m not buying immediately. I’m sitting in cash on the sidelines and watching, and waiting. The best 12 or so companies are on my watchlist and I’m monitoring their prices very closely.
They include FTSE 100 giants with record profits, hefty capital surpluses and high yields like Aviva and Legal & General. You’ll get the dual opportunity here not only for strong dividends but also share price growth and capital appreciation.
Also on my list are high-profit AIM-listed shares generating huge amounts of cash that will be helped by a general culture of people staying indoors. These include video game shares like Team17 that I’ve covered in detail elsewhere.
Hold on
Now isn’t the time to sell. Following the herd over the cliff will make you poorer in the long run.
It’s never good to see the value of your portfolio go down. But even worse for your long-term financial health is to realise losses at the bottom or near the bottom of the market.
If you’re an income investor focused on FTSE 100 high-yield dividend stocks and you sell in a panic, you undo all the work that compound interest has been doing for your money.
But now isn’t the time to buy either, I feel. Volatility is at an all-time high, and there’s much further these markets could fall. Trust me. Keep calm, and carry on watching and waiting.