This week has heralded another sharp sell off in the stock market – but whatever private investors do they must not panic.
When there is a mass sell-off of assets everything falls. Photo: AP
Of course, the situation in Europe is serious – with debt concerns moving from Greece to Italy to Spain and now France. the US deficit is also of serious concern. However, events currently unfolding are not the end of the world. Equity markets are likely to recover from this crisis over the next few years as the global economy improves, but there will be plenty of pain on the way.
When there is a mass sell-off of assets everything falls – the good assets and the bad. Investing is a long term affair and panic selling could means good investments are sold when they are cheap. This defeats the main investment principles of buying low and selling high.
Of course, the value of an asset is only what someone else is prepared to pay for it – so although shares look cheap at the moment they could get cheaper in the short term. However, returns from the stock market over time – particularly when dividends are reinvested – are still likely to mean it is worth staying in the market.
There’s also the fact that panic selling can crystallise tax liabilities to consider.
The truth is, now is actually a great time to buy quality companies at what could be a bargain prices, as long as you have a sensible investment horizon. And are brave enough.
Invest at the point of maximum pessimism." This is a famous quote from legendary investor John Templeton, who was one of the last century's most successful contrarian investors - hoovering up shares during the Great Depression. He was the founder of fund management group Templeton.
Conversely, the theory goes, you should sell at the point of maximum optimism.
It is important to remember that you will never time a market bottom or market top accurately. That's why Questor thinks the best investment strategy is to continue to drip-feed funds into the market – and this is especially the case when markets are falling.
This strategy is called pound-cost averaging and it makes good sense for investors with an appropriate time frame.
Although the sharp falls seen recently in equities is a concern – it is not a reason to panic. Sell in haste today and you may regret your decision in two year’s time.
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