FTSE 100 investors have had to contend with plunging prices and unprecedented volatility in recent weeks. A number of records have been broken, and not good ones.
The stock market crash of Monday, 9 March saw the FTSE 100 suffer its fifth-largest one-day drop in history. The double threat of coronavirus and a plunging oil price tanked markets worldwide. Then it all happened again on Thursday, 12 March. And again on Thursday, 19 March.
As we approach the start of April, markets are all over the place. So when should investors buy good companies trading at historically low prices?
Time in the market
You may hear advice to sell everything at fire-sale prices and wait for the market to bottom out before buying back in. That’s a major mistake, in my view.
There’s a great reason why time in the market is much more important than timing the market. No-one can time markets well. Anyone that does it relying on pure luck, instead of skill.
One of my favourite books on investing is One Up on Wall Street, by Peter Lynch. Lynch said that “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.” If you trade 20 times a day, pulling everything out and then chucking your money back in might work. But that’s a seriously high-risk strategy and I’m just not willing to risk my savings and investments on the whim of the markets.
The same idea has been echoed by every major investing figure I care to listen to. That includes the founder of Vanguard and creator of the first ever index fund, Jack Bogle. He said: “The idea that a bell rings to signal when to get into or out of the stock market is simply not credible. I don’t know anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has.”
Think long term
A much better strategy — as hard as it is when all around you are panicking — is to stay invested. Pick up good companies at attractive prices, and reinvest the dividends over the long term. That’s the kind of passive income I like. You’re effectively being paid for doing nothing at all.
I’ve not sold any of my investments. That includes FTSE 100 companies like Aviva and Legal & General. It includes the FTSE 250 growth champions Games Workshop and Avon Rubber. And also AIM-listed firms that have carried on growing while the markets dumped, including Team17 and Frontier Developments.
Selling now, I would lose all of the compound growth I’ve built up over the years. That nervous investors panicked and dumped everything just to be sitting on tens of thousands in cash seems crazy to me.
In fact, since the market crash, I’ve invested more in all of them. These are all highly cash-generative businesses with attractive dividend yields, that are trading below their fair values. If I thought each was good bet at a price-to-earnings ratio of 15 or 20, why wouldn’t I think the same at a P/E of 5 or 8?
I’m treating this stock market crash for what it is. A rare window of opportunity to get access to the companies I love at bargain basement prices.