Last week saw substantial stock market “corrections” around the world. The Dow Jones index fell by 4.2%, while the UK FTSE 100 fell 5.6%.
The falls have been fuelled by problems in the US housing and sub-prime mortgage markets, combined with fears that the days of cheap credit are coming to an end.
The guiding principle at times like these is “don’t panic”.
All is not doom and gloom. The Dow is still up more than 6% on the year, while the FTSE is only back to where it began 2007.
The companies represented by the lower priced stocks are still the same. They are still performing the same functions for the same profits and still have the same assets.
Markets are not always rational. They are subject to crowd psychology and often over-react to news, good or bad.
Investment is a long-term game. Markets have always suffered drops, and always will. But markets have always recovered from falls (eventually) and delivered healthy returns in the long-term. There is no reason to believe they will not do so again.
In my humble opinion now is DEFINITELY NOT the time to sell. Prices have already taken a hit and will sooner or later recover. If you needed the money tomorrow, then it shouldn’t have been in stocks in any case. Sit tight and weather the storm.
The really brave might consider this to be a good time for bargain hunting. Fine, but with two caveats. Take at least as much (and possibly more care) over stock selection than normal. Look for those stocks least likely to be affected by the causes of the drop and those with which the market has most over-reacted. And don’t get despondent if your acquisitions fall further before they rise. It’s near impossible to hit the exact bottom of the market, and those that do achieve it purely by luck.
