David Kuo: When gripped in a bear hug, try to remain calm
Sunday 14 August 2011
Stock markets were in free fall.
Shares plummeted so quickly that some bourses were pushed into bear market territory in less than a week of declining share prices. Although there is no formal definition of a bear market, it is accepted that it is when asset prices fall by more than 20 per cent. The DAX was down 22 per cent and the Hang Seng Index dropped 21 per cent. Germany and Hong Kong were gripped by a bear hug. China, the UK and Japan were within a whisker of being dragged into bear territory. Curiously, the US is not.
The stock market is likely to remain volatile for some time, because there is still uncertainty enveloping global economies. There are grave concerns over Europe's ability to deal with its debt pile. There are worries that growth in the US is stuttering. To make matters worse, China is experiencing raging inflation.
However, as long-term investors we need to ask ourselves: will the world be a better place in five years' time? If the answer is yes, then we should accept volatility as a price we pay for a higher rate of return.
It is vital to remain calm. Stock markets suffer occasional downturns but they bounce back. That is because in the long term, the price of shares are a reflection of the profits that companies make. That said, it is never easy to watch the investments you have made slide into the red. However, remember the advice of Warren Buffett, who said, "Be fearful when the market is greedy, and be greedy when the market is fearful."
So carry on with those regular contributions to your tracker because pound-cost averaging has always made good sense for long-term investors. A plunging market could provide a golden opportunity to buy tip-top companies at rock-bottom prices. All you need is the courage to buy.
David Kuo is director of financial advice website fool.co.uk
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