It’s always easy with hindsight to say that when markets sell off, the smart thing to do is to remain calm and consider buying assets at discounted prices (rather than panicking and selling assets). ‘Buy low, sell high’ sounds so easy in principle, but when the heat is on and you are investing during a major sell-off, this is easier said than done.
The reality is, when markets do sell off, there is always something happening to cause the downward move. Whether it’s the ‘Trump Tariff’ sell-off of this year, the inflation induced bear market of 2022, the COVID flash crash of 2020, the 2008-2009 financial crisis, the list goes on of events which have in the past caused major downward moves in equity prices. And every time it happens, it feels like it is justified, it feels like ‘this time is different’ and we should go heavily defensive with our asset allocations.
From banks failing, to the war in Europe, the highest inflation in 30 years, a global pandemic, or the latest economic recession scare, the lesson investors should learn from taking a long-term view of the past in equities is how resilient this asset class has been to all of these shocks. In every single sell-off event for global equities, and especially US equities, the periods of heaviest selling were optimal moments to be buying.
It is precisely because these events are so convincing in their nature that offers this opportunity. Headlines in the Financial Times or Bloomberg saying things like ‘This is a New Paradigm for Investors!’, or ‘Company X is Now Un-investable!’ is music to our ears as investors, because we’ve heard it time and time again and it usually signals the moment to be buying.
The most recent sell-off is another case in point. Just a few weeks ago you couldn’t open a copy of the Financial Times or spend a second on Bloomberg News without hearing another commentator tell us that ‘We are in a New Investment World’, because the US is now increasingly ‘un-investable’. The ‘new world’ we were apparently entering was one where the rest of the world sells American assets and moves their money somewhere else. This trend lasted about two weeks before US equities rallied back to where they had been before the sell-off. So much for a ‘new paradigm’!
In the heat of the moment, it did feel like something big was happening. Trump’s tariff announcements were the scariest thing to happen in world trade for 100 years, and this issue is not resolved yet. But the market overreacted. Tariffs are bad, sure, but to suggest that America’s dynamism as an economy, its technological leadership, and the reasons for investing there, have fundamentally changed because of tariffs was an overreaction.
The trick to timing the market on bad news is to ask yourself one question: does this new information mean that the equity stakes I own in these markets and businesses will be worth significantly less in 5 years time? In other words, will the underlying businesses you are investing in fail to grow their businesses between now and, say, 2030?
Short of World War 3, the answer is almost always going to be ‘no’. The issue causing the market sell-off, however scary it may seem, however sharp the selling in equity markets, is unlikely to actually have very much effect at all on the growth and profitability prospects of your investments over the long-term. And so, if the prices of those assets are now lower… you should be buying!
