Red alert everybody! It’s a catastrophe

But don’t worry!

Don’t panic!

Ain’t nothing going on but history, yeah

It’s alright

Don’t panic!”

Red Alert, Basement Jaxx

In part 1, I gave you some tools and strategies on what to do if you’re panicking and thinking of selling investments – that you still believe in – because their value is dropping. When I originally wrote the post, I didn’t think it would be split into two parts. But because this is such an emotive and important topic, I delved deep into it, and it turned into a bit of a behemoth. The more tools and strategies the better, right?

Reframe the Pain to Gain

Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

Warren Buffett, Berkshire Hathaway Chairman’s Letter, 1986

In March 2020, my portfolio value dropped by nearly £20,000 very quickly as COVID-19 hit the economy hard. That was around a 25% drop in value at the time. Lots of people panicked and said that this was a once-in-a-lifetime event, that the usual rules didn’t apply, and that we should all sell all of our investments. I didn’t sell; I invested spare cash I had been sitting on and maxed out my stocks & shares ISA. Within several weeks, markets had recovered (far faster than anyone thought possible), and I was rewarded for that decision. I’m not advocating market timing since no one can predict the future. However, I take the view that a significant drop in the market is a great buying opportunity. It’s like going into a shop and finding out they have a sale on. Would you go into a shop to buy something you need, find out they have a sale, and then say, “No, thanks, I’ll come back later once you’re charging higher prices.”?

When you invest in a fund such as the FTSE Global All Cap, you’re buying units of that fund. When the market is dropping, you can buy more units for the same amount of money. When prices are rising, you get fewer units for that same amount. In other words, when you’re in the wealth-building stage of your journey, the value falling is a benefit.

Let’s use my portfolio as a real-world example:

I have a direct debit set up to invest £1100 a month into the FTSE Global All Cap Index Fund. You can see from the above screenshot that the number of units I accumulate each month varies; the amount of money invested hasn’t changed each month but depending on whether the market has risen or fallen, I get more or fewer units. The more units you own, the more you benefit over the long-term from rising markets.

Know Your History

There have been many drops over the decades for a variety of reasons. The market has always bounced back and carried on marching relentlessly upwards.

Let’s take a look at what COVID-19 did to my portfolio as an example:

The arrow is pointing to the near £20,000 drop I mentioned earlier. It’s easy to look back now with the benefit of hindsight and say that it was obvious that sooner or later markets would recover. But at the time there was serious panic. People were calling it a once-in-a-lifetime event and saying that “this time it’s different.” Thankfully for my wealth, I was not one who panic sold. That wasn’t because I could predict the future or because I’m a genius investor; it’s because I believed in index funds, and I believed in the resilience of global economies and human beings.

Notice how short the dip is, despite the severity of the global impact of COVID-19. 

One of the benefits of index funds is diversification. During the COVID-19 pandemic, some sectors were hammered – think airlines, cinemas, restaurants and so on. However, some companies experienced phenomenal success, for example, tech companies like Amazon, Microsoft, Apple, Meta (Facebook), and Alphabet (Google). The success of these companies was such that they drove market returns higher. If you own an index fund such as the FTSE Global All Cap, you’ve got the winners covered.

It’s No Good to Pretend It Won’t Happen Again, ‘Cause It’ll Happen Again

Steve Wariner sang those lyrics in a song released in 1985. He was singing about unrequited love, but he could have been singing about market crashes (except no one would have bought the single).

The market goes up. The market goes down. It’s happened before and it’ll happen again. If this is the first time you’ve experienced this then you might be reacting differently than you thought you would. You can look at charts, you can listen to other people who’ve been through it, you can read blogs and listen to podcasts, but until it’s your money on the line and you’re seeing it disappear, you don’t really know how you’ll feel. This is valuable experience for the next drop – because there will, without doubt, be lots more drops in the future.

You Own a Tiny Part of Real Businesses

When you’re looking at falling numbers on a screen, it’s easy to forget that your money is invested in real businesses, with real employers working hard to make that business successful.

Has a temporary change in value made companies like those listed above less successful? Or is it just a change in perception?

Keep the Faith

Remember why you invested in the first place.

For me, that’s in the FTSE Global All Cap Accumulation index fund. My primary reasons were that the expenses are low, it’s highly diversified across countries, sectors, and companies, and is almost certain to beat actively managed funds with high fees over the long term.

Does a 20% reduction in the value of my units change any of those? No. Therefore, I have no reason to sell. I have 100% faith in my choice of investment and, since I haven’t reached financial independence yet, selling is not part of the plan. Fear is not an acceptable reason for me to sell. Panic is not an acceptable reason for me to sell.

I would, however, like to buy more units at the cheaper prices to speed up my future progress to reaching financial independence, so I would invest spare cash.

What Would You Tell a Friend to Do?

Imagine that a friend came to you in a panic, asking you if they should sell their investments. What would you advise them to do? Would it be, “Better sell before things get worse,” or would it be, “Stay calm, the market will recover.”

Stop Checking Your Portfolio

It’s tempting to check your portfolio every day to see if it’s gone up or down, especially when you’re a new investor and it’s new and exciting. But every time you check it you’re facing a temptation to sell if the recent trend has been downwards.

If you track your net worth, a good schedule is to check your portfolio in order to update your records. So, for example, if you update your net worth in a spreadsheet once a month then check the value of your portfolio and enter it into your spreadsheet. Then forget about it until the following month. Never mind the ups and downs, just get on with living your life.

That’s good advice for every stage of your journey: work your plan, be disciplined, be patient, and get on with living your life.