The Motley Fool

What to do when sharemarkets crash

Global markets have tanked again. We’re into bear market territory, and still falling.

The renewed fear is the United States will fall into a double-dip recession. The future of the euro remains uncertain, with markets still expecting Greece to default.

The world is poised for a financial crisis, according to Mohamed El- Erian, chief executive officer of PIMCO, the world’s largest bond fund.

It’s hardly surprising the world’s sharemarkets are in a funk.

Selling fever

Overnight, all the major indices gyrated between 3% and almost 5% in the red all day as investors sold just about anything that trades, from commodities to equities to currencies to gold. They’d have sold their soul if they could have.

The Aussie dollar, so strong for so long, has turned into a lily-livered weakling, now trading at close to 97 cents. So long parity. Farewell cheap overseas holidays and online shopping. Hello Gold Coast, Harvey Norman (ASX: HVN) and JB-Hi Fi (ASX: JBH)? Maybe.

Gold fell $66 to $1,742, a 3.3 percent decline and a five-week low. So much for it being a safe haven.

The VIX, a measure of fear and volatility, soared above 40, way above its usual trading range of between 15 and 25. Good bye risk. Hello safety. U.S. 10-year Treasury yields fell as low as 1.7 percent, the lowest in Federal Reserve figures starting in 1953.

Damaged portfolio

What’s an investor to do?

We Motley Fools have said it before, and we’ll say it again: Don’t panic. Most of the damage to your portfolio has already been done. You can’t change that.

But the decisions you make today can and will affect your future portfolio returns. If you feel like selling everything today and sticking your money under the mattress, ask yourself why you didn’t sell back in April, when the S&P/ASX 200 was trading at close to 5,000?

On the contrary, if you have the urge to trade shares today, with many companies trading as if the world is about to end, surely it’s a time to be buying, not selling. Isn’t it?

The bad news

We’re not going to tell you it’s all sunshine and unicorns out there, because it’s not.

Adding to the global economic woes, China’s factory output fell for the third consecutive month, fuelling the flames further.

BHP Billiton Limited (ASX: BHP) has warned a slowdown in China could hinder its growth. Sales to China represent 28% of its total revenue. Hinder might be putting it too politely.

The boom in the Big Australian’s share price is already over. Its shares are down around 30% from their 2011 high. The time to load up on BHP shares just might be getting closer.

Unsweet emotions

As a rule of thumb, any time you choose to invest your hard-earned dollars in the shares, you should have a time horizon of a minimum of three years, and preferably upwards of five. Investing is not for wimps.

Part of being a successful investor involves distancing yourself from emotions that otherwise would prompt you to do irrational things.

Right now that emotion is fear. One of our favourite Warren Buffett quotes is: “Be fearful when others are greedy, and greedy when others are fearful.” Another is: “Risk comes from not knowing what you’re doing.”

A sea of red

Judging by all the red coming across the tape right now, we think it’s fair to say people are fearful, and we’d argue plenty are selling because they don’t have a long-term investing horizon.

You should view days like this as opportunities. Think back to March 2009, a month in history that presented opportunities that we probably won’t see for another decade.

No one knew the market was about to bottom, but if you were lucky enough or had the resolve to go out and start buying when everyone was selling, chances are you’d have a multibagger in your portfolio.

Today is not worse than it was at the pinnacle of the financial crisis.

The Foolish bottom line

Move away from the monitor. Go outside and take a walk. Remember the future is far more important to investing than is the present or the past. Life will go on. Shares will recover, over time.

At the very least, if you choose to ignore our advice and remain glued to your screen, be greedy.

Do you want to know what to do during bear markets? Motley Fool readers can click here to request a new free Motley Fool report titled What To Do When The Sharemarket Crashes.

Bruce Jackson has an interest in BHP. The Motley Fool’s disclosure policy is sound.

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