The last few months have been truly testing for Australian investors who have watched the local sharemarket plummet, recover, and then plunge some more.
Indeed, after managing to narrowly avoid a technical correction, the benchmark S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) soared on the back of strong gains from the Big Four banks, but then crashed in what can only be described as a bloodbath on Thursday. The market now sits at 5524 points, down from an April high of 5996.
This recent volatility has created significant pessimism in the financial media, with some commentators suggesting another big sharemarket crash could be imminent – perhaps even worse than the Global Financial Crisis endured in 2008 and 2009. This pessimism is affecting investors, many of whom have taken their funds off the table to avoid further losses.
Pessimism vs Cautiousness
While this strategy might seem like a smart move in the near-term, investors who utilise it could actually be doing serious damage to their wealth in the long term. In a recent article penned by Motley Fool writer Morgan Housel stated that one of the fundamental elements to becoming a successful investor is knowing the difference between 'pessimism', and 'cautiousness'.
Pessimism, as Housel points out, "is the dumb idea that things will never get better." This is the short-term outlook being employed by many investors who have sold their stocks in the face of fear, possibly to never return to the market again.
Cautiousness, on the other hand, is "the smart idea that things get better over time, but only if you have enough flexibility to remain invested when things get ugly."
Remaining flexible
As terrifying as the market's mood-swings can be, taking your funds off the table when things get rough can be one of the worst things you could do. While you're selling at a discount and in a state of panic, another investor on the other end of the transaction is likely buying your shares with a big grin on his/her face, understanding the bargain they've just managed to pull off.
Indeed, investors should remain cautious during these tough times, and ensure they always maintain a pile of cash just in case conditions do continue to deteriorate (whilst also giving them the flexibility to buy other great stocks at discounted priced). Right now, that could include companies such as Coca-Cola Amatil Ltd (ASX: CCL) or Woolworths Limited (ASX: WOW), both of which I believe are representing reasonable buys at today's prices.
