In sport, what really stands out among top professionals is they make far fewer unforced errors than amateurs. In the world of investing however, I reckon professionals frequently make more errors than long-term private investors. And I think that shows in a stock market crash more than any other time.
Some mistakes are inevitable, but we can benefit by learning from them. We can also gain from the mistakes of the professionals too.
Don’t panic and sell
What happens when an asset class, like shares, suffers? The institutional investors start messing with their risk calculations and their asset allocation algorithms. If a stock market crash comes along, they’ll shift out of shares. Maybe into bonds, or gold, or whatever.
But that panic-led flight only makes things worse. It pushes shares down further than they would have gone. Now, sure, some will deserve to be valued more lowly when a stock market crash hits. Those are the ones whose businesses are directly affected by whatever catastrophe has kicked it all off. But did the FTSE 100 deserve to crash 35% in a month? It’s now back to a fall of only around 10%, so I don’t think so.
That’s the first mistake, which I didn’t make this time and won’t next time either. I won’t sell shares in perfectly good companies at rock bottom prices when a stock market crash pushes them down too far.
Buy at stock market crash prices
So, should I wait and see how things unfold? No, I want to buy oversold shares when they’re super cheap. I couldn’t buy during the key period around March, because I was already fully invested and had no spare cash for more shares. That makes me ponder another question. Is it a mistake to not keep some cash back for something like a stock market crash? I’ll have to think more about it. But I usually decide that being fully invested is better in the long term.
When it comes to buying, there’s one mistake I always try to avoid. Some of the most tempting bargains can be those stocks directly affected. I’m thinking of companies like Rolls-Royce and International Consolidated Airlines here. Their businesses have been shattered, but they’ll survive and recover, right?
I think so. But I reckon it could be a big mistake to buy before I see real indications of a recovery happening. And I’d surely be wrong to invest in shares that I’d never buy in good times, like airlines.
Never forget the long term
I think possibly the biggest mistake, which really encompasses the first two, would be for me to forget my long-term approach. Even with that in mind, it can be so easy to panic and want to sell when a stock market crash hits and we see our nest egg slipping away. But I bought my shares to hold for the next decade or longer. Not for just this year, or next year.
I might have avoided some short-term losses had I sold some shares. But looking back over my decades of investing, I’m convinced that reacting on short-term situations would have left me significantly worse off.
The post 3 mistakes I must avoid in the next stock market crash appeared first on The Motley Fool UK.
Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020