Things can change quickly in the financial markets. Less than a week ago, the FTSE 100 was hovering above 7,700 points, only a few percentage points below its all-time high. However, as I write this on Monday afternoon, the index is currently trading at around 7,250 points, after falling 2.3% on Friday and another 2% this morning on the back of trade war concerns.
This kind of market volatility can be extremely frustrating – and perhaps even a little scary – for investors. No one likes to check their portfolio and see a sea of red. All those gains you have built up over a period of months can disappear instantly. However, it’s important to remember that market volatility is a normal part of stock market investing. With that in mind, here’s what I’d do if I was feeling a little on-edge as a result of the recent drop in the FTSE 100.
Stay calm In these situations, staying calm is essential. You don’t want to make any irrational financial decisions because you’re panicking. Remind yourself that investing is a long-term game and that stock markets have a great track record of bouncing back after a fall. Just look at how the FTSE 100 recovered from the sharp sell-off at the end of 2018. Remember, you haven’t actually lost any money until you sell.
Put the falls in perspective It’s also worth putting the recent falls in perspective. Early last week, the FTSE 100 was up nearly 15% for the year. Now, markets never go up in a straight line, so you could argue that a pullback was always on the cards. After a 15% rise in just seven months, it wasn’t going to take much for a bit of profit-taking to kick in.
Construct a wishlist Finally, what I always do when markets are tanking like this is put together a wishlist of high-quality stocks that I want to buy, together with the prices I’d ideally like to pay for them. I then monitor these companies closely with a view to buying when the price is right. Often, when investors are in full-on panic mode, good companies are dumped with the bad, and this can create brilliant buying opportunities for those with a long-term view and capital ready to deploy.
If I was to construct my own wishlist right now, it would include names such as Unilever (LON:ULVR), Diageo (LON:DGE), Reckitt Benckiser, Smith & Nephew (LON:SN), and Hargreaves Lansdown (LON:HRGV). All of these companies tend to trade at higher valuations because they’re generally seen as high-quality companies. If I can buy some of these businesses for my portfolio at attractive valuations, I’ll be happy.
In conclusion, market volatility can be unnerving. It’s never pleasant to see your wealth evaporate. However, if you stay calm and act rationally, you can actually use the volatility to your advantage and set yourself up for the long term.
Edward Sheldon owns shares in Unilever, Reckitt Benckiser, Diageo, and Hargreaves Lansdown. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo and Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019