The FTSE 100 has endured a poor run in October. At the start of the month, the index was up around the 7,500 point mark. However, by the end of last week, it had fallen to 6,940 points – a fall of around 7.5% in less than a month.
As I noted in an article over the weekend, investing has certainly felt challenging at times, recently. Friday was a great example, with most stocks in the red, and many FTSE 100 stocks down 2%, 3%, or more.
However, it’s funny how the stock market works. Today, the Footsie has rebounded strongly, and it was up approximately 2% at one stage a little while ago before pulling back to a 1.25% rise. Plenty of stocks have bounced much higher than that, too. For example, as I write, HSBC Holdings (LON:HSBA) is up 4.9%, BT Group (LON:BT) has jumped 4%, and Royal Mail (LON:RMG) has bounced 4.7%.
Some of my favourite stocks are having fantastic days as well, such as insurer Prudential (LON:PRU), which is up 3.5%, packaging specialist DS Smith, which has surged 3.9%, and financial services group Legal & General Group (LON:LGEN), which has risen 2.7%. So, what’s the key takeaway here?
Don’t panic To my mind, nothing sums up the current market situation better than this quote from famous US fund manager Peter Lynch who advised: “The real key to making money in stocks is not to get scared out of them.”
Given that Lynch averaged a 29.2% annual return, and continually smashed the market while managing funds at Fidelity Investments between 1977 and 1990, it’s probably worth taking note of that quote.
Humans hate losses On days like Friday when stocks are tumbling sharply, it’s easy to get panicked out of the market. That’s because investing doesn’t feel good when the market is falling. Even if you’ve been investing for 30 or 40 years, it’s still gut-wrenching to look at your portfolio and see big falls across the board.
As humans, we tend to dislike experiencing investing losses. In fact, behavioural finance studies have shown that for many investors, the pain of experiencing losses is a much stronger emotion than the joy that investing gains bring. That’s often why markets fall so sharply at times – investors hate losing money and end up panic-selling to avoid racking up losses.
Don’t miss the big gains However, what today’s market action shows is that volatility can work both ways. When markets are turbulent, a big down day can easily be followed by a huge up day. And if you do miss those up days, your returns are likely to suffer. As an example, research from Schroders (LON:SDR) earlier this year concluded that if you had invested £1,000 in the FTSE 250 index in 1987, and simply left it for 30 years, your money would have grown to nearly £25,000. Yet if you had missed the index’s 30 best days in that time, your portfolio would have grown to less than £7,000. So, clearly, it’s important not to miss out on those big up days.
Ultimately, for long-term investors, the key is to try and remain as calm as possible and make rational decisions when markets are in a crazy mood. It’s not always easy, but if you can stay calm while others are panicking, you’re likely to be rewarded in the long run.
Edward Sheldon owns shares in Prudential, DS Smith and Legal & General Group. The Motley Fool UK has recommended DS Smith, HSBC Holdings, and Prudential. 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.