Don't Panic - Douglas Adams was right!
The bedtime book that I am reading to my children at the moment is The Hitchhiker’s Guide To The Galaxy. In this time of rioting and stockmarket collapse, why do I choose to open an Ovation Bulletin with this fact? Because, as those of you familiar with the story will know, The Hitchhiker’s Guide To The Galaxy sells more than its rival, the Encyclopaedia Galactica, because of the two words it has printed on its cover – DON’T PANIC!
The UK Stock Market dropped again this morning, taking it below 5,000. And this is where those two words really kick in. One of the golden principles of medium to long term investing (which is the only type of investing Ovation is interested in) is that you never act upon a kneejerk reaction. It may be tempting to sell everything and hide the money under the bed, but selling after a downturn simply means crystallising a loss.
Of course, markets could go lower, but history tells us that as many short term less experienced investors panic (that word again) and sell to cut their losses, so the professional investors move in and buy shares on the cheap. This causes markets to bounce back after sharp dips. Of course, the day may come when this does not happen, but our message has to be that this is not the time to be getting out.
Now here is where you might need that Babel fish....we're going to talk about the markets:
The major markets Nikkei, Hang Seng, Euro Stoxx, S&P 500 and FTSE 100 are down as much as 12% over the last week. There is not a great deal of new information that has precipitated the fall; rather a collective loss of confidence. This had been caused by a weakening of economic data which has been amplified by the loss of market liquidity that occurs during the holiday season.
Whilst there are fundamental problems with the US economy, there is no information that wasn't available a month ago. This is what sets the situation apart from 2008, when there were a lot of unknowns that unravelled quite quickly.
One of the hardest things to do is to remove your emotions from your investment decisions – but it is vital that you do, because emotion can overshadow logic, resulting in the wrong decision for the wrong reasons.
There are several good reasons not to sell:
- Paper losses are not real losses until the investment is sold. Therefore it is best not to sell in a falling market unless you are forced to for a specific reason.
- Markets do recover from crashes as we have seen over the last few years. Even accounting for the last few days, the FTSE 100 is up about 40% since its low of 3512 on 3rd March 2009.
- As a private investor, you should be taking a long term view – that means five years or more.
- When you have a long-term view, these are in fact the times to buy. Stocks are getting cheaper, and the market was not expensive to start with. Equity market valuations are undemanding and company fundamentals are in robust shape.
However it is very difficult – if not impossible – to time a market top or bottom. The best strategy for those looking to invest new money is to ‘drip feed’ into the market.
The bottom line is, don’t panic, take a long term view and if you have money to invest consider it a good time to pick up a bargain.
To finish, here is a thought from the Ovation Team and we're sticking with Douglas Adams on this one:
"A learning experience is one of those things that says, 'You know that thing you just did?
Don't do that."