Having money invested in stock markets can sometimes be a bit stressful when markets are dropping. And in such situations, the investing approach you opt for could influence the future of your journey as an investor. Here’s what you could choose to consider when markets dip.
Investing is a long-term strategy
Investing should be approached with a long-term vision and research shows that peaks and troughs tend to balance out and provide growth if you remain invested over many years. A study found that people investing during any 10-year period over the past two decades in the FTSE 100 index had a 95%3 chance of making a positive return on their investment. People who invested in the S&P 500 in April 2007, just before the 2008 financial crash, and held on to their investments for 10 years had a return of 7.8%4, annualised, including dividends. So, when markets drop, try to think long-term and enjoy the power of compound interest (interest earned on interest). Compounding works like a snowball getting increasingly bigger as it rolls down a snowy hill. Similarly, staying invested for many years can allow you time to ride out ups and downs and it might help you fund your long-term projects.
Keep calm and ignore the noise
Seeing markets fall when you’re invested can be unpleasant. And yet, doing nothing might sometimes be a good approach to face such a situation. Healthy markets like any rollercoaster, have ups and downs. For example, between 1985 and 2016, the FTSE 100 had 22 years of overall positive growth and 10 years where it delivered negative returns1. Falling markets aren’t an unusual event and bumps can be part and parcel of being an investor. You could learn to live with them and accept that your investments might go down, time to time. You could also put your emotions aside, ignore the media craze, and avoid the urge to sell your investments. And historically, downward movements haven’t continued forever, and whilst nobody can predict the future, evidence suggests that stock markets can bounce back over the longer-term. For instance, the S&P 500 index lost 37% of its value during the 2008 financial crisis, however the market recovered fully by 2012.2
1: Forecast Chart, Dec 2017- http://www.forecast-chart.com/historical-ftse-100.html
2: The Balance, Nov 2017 - https://www.thebalance.com/stock-market-returns-by-year-2388543
Figures are based on past performance and past performance is not a reliable indicator of future results.
Consider investing more
This might seem a bit counterintuitive, but one famous mantra in investing goes ‘buy low and sell high’ – meaning buy stocks and shares when there’s some lower prices to be had and sell them when they rise in the hope of getting a potential good return (in practice of course, they might not always rise!). Falling markets can give you the possibility to pick up some cheaper investments so, if you’re a long-term investor, it can also present the opportunity for potential growth in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.