The last two weeks have seen greater market volatility than investors have experienced since the financial crisis over a decade ago. While it’s nothing like the size and scale of the 2008 global crash, many new investors won’t have experienced anything like the losses we’ve been subjected to this year.
As the more hardened investor will tell you, this volatility is nothing new. Stock markets go up as surely as they go down.
And that outlook is backed up by history too. You’ll see a long term period of growth followed by a short sharp correction that is initiated by some bad economic news which, eventually, leads to a raft of mass panic selling. Investors may see up to 40% of the value of their investments erased at the height of a sell-off.
Now, this is a rather large over-simplification on my part. But the cycle is nearly always the same.
How do experienced investors handle a stock market fall?
The experienced investor has seen this all before. They see a fall in stock market values not as a time for panic selling, but as a time for opportunity – a time for buying. Who wouldn’t pass up the opportunity of buying quality at discount prices, right?
Investment guru Warren Buffett summed it up perfectly, “Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
For the more nimble investor, there are a number of ways to make money when the stock market falls, but these options generally require fast reactions and an emotional detachment to trading that isn’t a natural fit for many of us.
Now, the key to making money in the stock markets is to buy low and sell high. Makes sense doesn’t it? But do you know how many experienced investors know precisely when to act?
Well, I’ll tell you. The answer is none.
There is no investor on earth, no matter what they tell you, that knows specifically when a high or low has been reached, until, of course, the point where it has actually happened. There is no chart, data or ratio that exists to aid this process.
With a defined strategy in place prior to a downturn, the experienced investor will increase their chances of making larger gains as the markets begin to rise. At worst, they will be in control of their actions and not subject to the panic and fear that tends to grip the financial markets in the event of a crash.
It is important to bear in mind that the one thing they will not do, under any circumstances, is sell when everyone else is selling.
The key then, is to carefully choose your investments and buy at a price you are happy with. If the opportunity arises to purchase more at less, then that’s a great way to reduce the average price of your stock.
If prices are falling so fast you can’t keep track, then you are already too late and the bottom is likely to be in sight. Hold tight, don’t panic and trust your investments to bounce back – and if you can top up, that’s the time to do it.
So what’s in store for the markets?
At the time of writing, we’ve seen a positive response from US equities with the Dow Jones moving back in to positive territory with the Dow Jones climbing 300 points in Friday’s session which has filtered across the Atlantic to European indices which have responded positively today, with the FTSE currently up 100 points (1.4%) and the CAC and Dax up 1.2% and 1.7% respectively.
Whether this is the end of the volatility remains to be seen.
There is a feeling amongst investors that global stock markets are over-priced following ten years of almost unbroken gains. With central banks starting to increase interest rates in 2017 and government bond yields spiking, this ride may not be over yet.
CMC Markets analyst, Michael Hewson suggested there are some longer term factors in play in the US that may impact global markets. “US margin debt still remains near record levels and the prospect of further losses, combined with the prospect of higher rates could prompt further jitters, not to mention the untried reaction function of a whole new breed of equity investors and traders who have never experienced the type of volatility that we’ve gone through over the last few days.”
“It is true that economic fundamentals remain fairly solid but it is also important to remember that this is already probably priced into US equities already, given that we’ve now seen tax reform get passed, along with a new US budget, which in itself is likely to see bond prices come under further pressure.” he added.