Yesterday, the FTSE 100 fell 3.5% capping off the worst week for the blue-chip index since March 2020. As the sell-off accelerated, the clear temptation to sell out and run for the hills can be overwhelming. I can tell you what I did, though. Absolutely nothing. Let me explain why.
What astonishes me so much about investing is the herd mentality. Just as people will rush to buy in to the next new stock craze, so they will sell out just because others are doing so. But all that panic-selling does is crystallise one’s losses.
Until an investor has experienced first-hand a widespread sell-off like we witnessed yesterday, there is really no way of gauging how one might react in advance. If I had hit the sell button and locked in losses, then in the immediate aftermath I would:
Assess my appetite for risk. Revisit the stocks that remain in my portfolio. Carefully consider whether they fit my long-term investing goals and level of risk
If I had not done so already, I would consider investing some of my savings in a tracker index to diversify my portfolio
Temperament and conviction
When I tell friends and family that I have bought shares in companies, I am almost always met with a response like: “Do you enjoy losing money?” That is because most people are pre-conditioned to think that investing is a sprint, when in fact it is a marathon. Look at any major stock market index like the S&P500, FTSE100 or Nasdaq. They all have one thing in common: an upward trend line over a long-term timeframe.
For me, the most important factors that determine the level of returns an investor can expect from their investing career, are conviction and temperament. After all, that is the secret sauce that made Warren Buffett the most famous investor in history.
As a relative newbie investor – I bought my first stocks in November 2019 – I have only ever experienced one sustained stock market sell-off. The Covid crash decimated my portfolio. At one point it was down 30%. However, every stock I had invested in was a blue-chip. Each had a decades-long track record of generating substantial returns for investors and a proven business model. And while most were selling, I was doing the exact opposite and buying. It turned out to be the best move I ever made.
So, what gave me the confidence to do that? Simple. I had done my homework. I had researched the companies. I had considered factors such as their value proposition, competitive advantage over rivals and wider market trends. I gleaned most of that information from their free annual reports as well as my own personal sector knowledge.
Never underestimate the power of knowledge. As the maxim goes, knowledge is power. It provided me with confidence in my stock picks. That is why investing is an inherently personal journey. Far too many investors believe that they are in competition with other market participants. But for me, an investor’s greatest enemy is staring at you in the mirror!
So, if the market does continue to fall in the coming weeks, I will not be selling. Instead, I will be buying my favourite stocks on my watchlist.
The post As the FTSE 100 drops 6.8% in a week, now is not the time to sell out appeared first on The Motley Fool UK.
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