Some of you will have had a similar experience to me in the wake of the stock markets latest swoon.
No, Im not talking about the dizzy fits, fainting and banging the side of your PC thinking the screen must be broken because the share price graph is plunging so steeply from left to right.
Sure, we all feel a little bit of all of that,however many times you remind yourself that youre in it for the long term, and the short-term turbulence comes with the territory with shares.
No, Im thinking about the family and friends who want to know:
- Why is the stock market falling?
- Is the global economy going off the rails?
- Should they sell everything and flee to the hills?
- Or is this a good time to buy more shares?
If youre the investing one in your social circle then such queries probably sound familiar
How to be wrong
I dont mean to make fun of people.
For those not experienced in the topsy-turvy ways of the stock market, these questions all seem perfectly reasonable.
Indeed, even experienced investors cant help wondering whats going on after this sharp stock market reversal.
But the fact is these questions while perfectly natural are not ones we can confidently answer.
Not without a crystal ball or a time machine, anyway.
- There are always dozens of competing theories for why markets have fallen, many of which are contradictory.
- Economists often predict recessions that dont happen.
- Selling in a crash is a textbook mistake unless youre one of the lucky ones who manage to duck out before further falls.
- What does a good time to buy shares really mean, anyway?
Suffice to say, markets are notoriously unpredictable and pundits who claim otherwise are repeatedly proven wrong.
Just another Manic Monday
To me, short-term market-wide moves usually look more like randomness than anything else.
Even if you can find a convincing reason for a particular big fall, you have to ask why it happened this month and not last month, or in three months time?
Usually the explanations just regurgitate well-known information.
Mostly it will be hindsight talking, due to the universal human tendency to want to believe we understand whats going on.
A classic example was the Black Monday crash of October 1987.
Major markets fell precipitously and then continued to decline.
They ended up down 20-40% in just a matter of days!
And everyone had their theories after the event.
However, even 30 years on, experts are still debating them!
As for the markets ability to predict recessions the economy did fine in 1988, and within a year or two most markets had recovered.
It was all one big false alarm.
Smarter thinking
Whats much more important than trying to predict the unpredictable market is to know your investing goals, and whether youre invested appropriately.
Here are three better questions to ask when markets fall.
1. Am I invested sensibly for my age and financial position?
Rather than wondering if you should sell up or whether you should convert your cash ISAs into stocks to bag bargains I suggest going to a caf to think about how youre invested and why.
If youre young and plan to put money away for decades to come then falls are great. They make shares cheaper to buy for your long-term returns.
(Although do remember your other likely financial commitments, such as your mortgage and an emergency fund.)
If youre approaching retirement, you should not have too much in shares. You also need bonds and cash to smooth out the volatility, as you have fewer years of saving to recover.
Aged in-between? Your mileage will vary. Read up on asset allocation and the appropriate mix of bonds and shares for your age. Getting that right will probably be much more beneficial in the long run than any attempts to time the market.
2. Am I appropriately invested for my risk tolerance?
Whatever theory says about how much you should have in shares is irrelevant if you cant sleep at night
or if you sell up in the middle of a crash out of sheer fear!
Ask yourself how have you felt in this correction?
Also, how did you respond to the bear market of a few years ago?
If such episodes left you feeling vulnerable, take note of that and aim to increase your cash and bond holdings over the next few years.
If its worse, though youre plain terrified then its better to accept youve taken on too much risk and consider reducing your exposure. The market decline hasnt been so bad yet to make this a disaster.
Lesson learned. But even then Id not think in terms of selling everything or of going all in for that matter.
Move slowly and stay balanced. Leave the big bets for the gamblers.
3. What should I really be buying?
Lets say you have spare cash, youre comfortable with the potential for further falls, and on reflection you want to add more to equities.
Good for you buying when others panic is quintessentially Foolish but dont change your focus in the pursuit of the cheapest prices.
Some shares and sectors always fall more than others in a slump.
That doesnt mean theyre the ones you should buy.
Buying whats cheapest can be a terrible strategy if you dont know what youre doing or if you do know, but you happen to be wrong.
Think of the bargain seekers who kept averaging down into dotcom failures that eventually went to zero in the tech crash of 2000.
Or in more recent years, buying apparently cheap small-cap miners and energy firms has been potentially catastrophic as theyve fallen as much as 90%.
Rather than indiscriminate dumpster diving, stick with your usual style of investing. If you happen to get especially keen prices this time around then thats a great bonus!
If you use funds, add to your allocations according to your overall plan.
If youre a stock picker like many of us Fools, forget that list of the biggest fallers and instead favour your watchlist of quality shares that youve been tracking for years.
Provided the wider economic factors havent changed your view of a particular companys long-term prospects, this wobble could well be the chance youve been waiting for.
A Fool for all seasons
Chasing the market up or down is a mugs game for most.
But taking advantage of the summer sales to buy those shares weve always wanted to own is something entirely different.
Its sensible and savvy investing.
Yes, we’re in it for the long haulhere at the Motley Fool, andwe focus on investing in great businesses for years rather than months. It’s over that kind of time horizon that we can make sensible judgments on how a business is likely to perform, and whether the price is right.
If you’d like to see what I’m talking about, thisinvestment dossierfrom our top Fools may be of interest to you.
It’s called ‘The Fool’s Five Shares To Retire On‘, and it’s currently free to view. It contains the five shares which we believe could be perfect for building a long-term portfolio. If you’re looking for investment ideas, which you can act on right away, this would be an ideal place to start.
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