I’ll assume Bristlemouth readers don’t need me to hold your hands. I’ll assume you know that the aim is to buy low, sell high. And I’ll assume you are a little bit excited about the falls we are seeing on global markets, anticipating an opportunity to put some of that cash you have been sitting on to work. With all those assumptions in hand, here’s what to do (or not to do) when markets tumble:
1. Stick to what you know. This is not the time to be researching new stocks you have never heard of because their prices have fallen 50%. You have hopefully been working away in boom markets to develop a list of stocks you would like to own at the right price. This is the week to dust it off and put it into action.
2. Focus on better quality businesses. We were still sifting through the rubble of the 2008-9 bear market two years after the recovery and finding screaming bargains. At times like this, invest in the businesses you know are great and come back for the rest later.
3. Keep some ammunition. There’s nothing worse than getting all excited over a 10% fall only to see the market fall 20%, so keep some powder dry just in case.
4. Act. Subject to the caveat above, this is a good time to be investing. The ASX All Ordinaries Index is down 16% from its recent highs. Including dividends, the annual return from the index in the almost 6 years since we started the Australian Shares Fund is now less than 7%. It’s not the opportunity of a lifetime, but Australian equities will return perfectly acceptable returns from here. Don’t sit on your hands waiting for some divine signal that the market has “turned”.
5. Don’t ignore reality. In the financial crisis many value investors piled into banks and financial services companies as their share prices plummeted. It turned out the panic merchants were right to panic. This time around it is China’s economy that has everyone panicking and there are good reasons for it. It will come as no surprise to Forager investors or Bristlemouth readers (see Why China’s Hard Landing is a Certainty) but China’s economy is a mess. Don’t buy stocks where the price assumes anything better than a modest slowdown.
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