Deep dive into stock market drops – lessons from history

One of the biggest fears as an investor is the fear of missing out – with fast paced and sometimes volatile markets, it can quickly feel like there’s a lot to miss out on.

Buying and selling investments to bank the profits or to avoid sudden dips in the market might seem like a good idea at the time. But it rarely leads to the best outcomes in the long run.

There’s a fine line between waiting for a good trade and pulling the trigger out of fear, so don’t let your emotions get the better of you.

This article looks at why long-term investing is so important, but it isn’t personal advice. If you're not sure if an investment is right for you, please ask for financial advice.

Human nature can be costly

We’re emotional beings by nature, and investing can be a rollercoaster of emotions at times. There’s the thrill and excitement when the market goes up, but panic when it falls.

The way our emotions change during the highs and the lows is why lots of us decide to invest when markets are doing well and sell when markets are falling. This goes against basic, good investment practices like thinking long term.

Some investing dos and don’ts to bear in mind:

• You do want to find high-quality companies and investments at the right price that you can hold for a long time.
• You do want to collect steady dividends or growth over the long term.
• You don’t want to jump in and out of investments trying to time the market.
• You don’t want to get swayed by short-term price movements.

Market falls and comebacks

Reading blaring headlines or seeing the value of your investments fall isn’t fun. It can be worrying. Sure, there’s been some bumps along the way, but that’s the nature of investing.

Here are some of the biggest falls in value of the UK stock market since 1985 and how long it took to recover. For these examples we assumed you’d invested at the highest point before the market started to fall.

UK stock market performance following drops

Past performance isn’t a guide to future returns. Source: Thomson Reuters Eikon, 13/04/2023. Where no figures are shown data is unavailable.

The key point to all of this is tough times haven’t lasted forever, and markets did eventually recover.

It’s important for investors to think back to their long-term strategy and stay resilient when markets are jittery. Make sure you’re happy with the level of risk across your investment portfolio – the more risk you take on, the bigger the potential drops.

When markets are on a downturn, you could see this as an opportunity to top up your investments at lower prices. Of course, there are lots of factors that can change an investment’s price. It’s essential to do your research and decide why the investment price is low, and if it can recover later on.

You don’t know what’s around the corner. But holding onto these investments, instead of impulsively selling, might benefit you in the long run when prices eventually recover.

Investing in rising markets

When market prices are soaring on the other hand, lots of us want a piece of the pie and end up overpaying for stocks.

It’s essential to have the same mindset and approach to investing if the market is rising, or if the market is falling in the short term. You might think we sound like a broken record when we tell you to think long term when you invest – but we really mean it. That means five years or longer.

Historically, shares have typically delivered better long-term returns than other investment choices like bonds, property, or cash – but that shouldn’t be seen as a guide to the future. It’s essential to do your research and think about what the world could look like in the future. Which companies will adapt and grow with change?

If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes

Warren Buffett

If you find yourself selling frequently trying to lock in that short-term profit, maybe it’s time to consider, is this leading to the best outcome for the long-term?

Diversification is key

If you’re regularly dipping in and out of the same investment to try and benefit from the highs and lows, you open yourself up to more risk from a lack of diversity in your portfolio.

Diversification is an investing essential to help manage any bumps in the road.

We use diversification to help smooth out the ups and downs a portfolio could go through if you hold just one, or a few investments. Whether it’s types of companies, types of investments – like shares and bonds – different parts of the world, or investment styles. There are lots of ways you can do it.

Picking individual companies isn’t always the answer to start diversifying – it’s certainly not the easiest way. An alternative investment option is funds, where professional fund managers make the underlying decisions and choose a selection of investments. It is important to regularly review all your investments to ensure they meet your objectives and attitude to risk.

Ready to invest?

Whether you’re new to investing or with years of stock market experience, hand-picking individual company shares with long-term potential isn’t a walk in the park. It takes countless hours of research to find the stand-out companies of the future.

We think funds are a great option for simple and effective long-term investing. Funds pool together money from lots of investors. They invest in a collection of investments which are chosen and run by a professional fund manager, so you’ll benefit from the manager’s knowledge, expertise, and research into lots of different companies.

Funds come in all shapes and sizes. Some funds invest purely into company shares, which are better suited for investors willing to accept more risk. Others hold a mix of investment types like shares, bonds, commodities, and cash for a more conservative way to invest.

USE OUR FUND FINDER TOOL

Investing in funds isn’t right for everyone. You should only invest in funds if you have the time and know-how to diversify your portfolio to help reduce risk.

Before investing it’s important to check the fund’s objectives align with your own, understand the fund’s specific risks and if there’s a gap in your portfolio for that type of investment.

Remember, all investments go down as well as up in value, so you could get back less than you invest.

If you don’t have the time or confidence to choose your own investments, you could pay an expert to do it for you.

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The Wealth Shortlist is a collection of funds we've researched and chosen for their long term potential.

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