How to cope with panicky markets

With Europe still a mess and China coming down to earth with a bump, markets are starting to lose their heads. But you shouldn't lose yours, says John Stepek. Here's what to do when markets take fright.

Greece has managed to throw the eurozone into turmoil for the third year running. For an economy that the bulls love to describe as insignificant', it sure knows how to throw its weight around.

On top of that, markets have finally woken up to the fact that China is not some sort of perpetual motion machine, but a bog-standard, boom-and-bust-prone economy, just like all the rest.

With markets apparently losing their heads, it's easy to feel you have to do something!' at times like this.

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Should you sell everything you own? Or pile in wholesale?

Here are our suggestions

The bullish answer to everything print more money

The Greeks are going back to the polls in June. You can read more about this and a Greek exit in a piece by my colleague Matthew Partridge. But in short, don't expect them to change their minds from the original vote.

Meanwhile, China's economy is slowing down more rapidly than markets had expected. The bulls have gone from denying that there's a slowdown, to arguing that the government is bound to loosen monetary policy to drive a rebound.

In fact, more money-printing is pretty much the bullish answer to everything. If the eurozone looks like melting down, someone will print money. Even if the European Central Bank doesn't, surely the Federal Reserve or the Bank of England will step in?

But being left to rely on central bank printing presses which are no sort of long-term solution anyway and the actions of politicians leaves investors in an incredibly uncomfortable position.

So what can you do?

I could say "don't panic". But that's as useless as it is trite. When you are confronted by a sea of red when you look at the stock indices, or when every news channel and newspaper is talking about Armageddon' and Grexit', it's hard not to react.

So instead, I'd like to offer some advice on how to handle situations like this.

How to stop yourself from panicking

If you're worried, then by all means review your portfolio. I've mentioned in the past that you should write down your reasons for buying (or selling) something, before you do it.

If you've done this, then you'll have a list of stories' that will remind you of why you are holding an investment. If you haven't, then in the process of reviewing your portfolio, try to remember why you bought the investment in the first place, and write it down now.

Have the stories changed? Is the stock you bought because "it's cheap" now expensive? Has there been fresh news on the company that undermines your rationale for buying it in the first place?

Or has a major theme changed? It's as easy to fall in love with a theme as with a stock, particularly if it's been profitable for you in the past. But when the time comes, you have to let go.

For example, we were among the first to suggest buying into the long-term bull market for commodities, back in the early 2000s. However, we've been arguing for some time now that the slowdown in China is bad news for the commodity supercycle, and industrial metals in particular. If you disagree with that, that's fair enough. But I'd say that the onus is now on the commodity bulls to explain why the bull market can survive a significant slowdown in China.

Another good indicator that you should sell something, or reduce your holding, is if it's preying on your mind. There's a great line in Edwin Lefevre's Reminiscences of a Stock Operator where one trader complains to the other that he can't sleep at night because he's holding so much cotton. The other replies: "Sell down to the sleeping point."

Doing all this is useful in itself you should review your portfolio regularly. But the main point is to slow yourself down. If you're going to sell, it should be for the right reasons not just because the rest of the market is falling.

On the upside, this is also a good time to set up, or update, a watch list. Having a menu of stocks or other assets that you'd like to buy, but you're hoping to get hold of more cheaply, is always handy. It will also help dissipate some of that urge to do something!' that always comes when markets are spiking or plunging.

On that note, my colleague Phil Oakley has come up with a list of six FTSE 350 stocks with a great track record of making money for their shareholders. These sorts of stocks rarely come cheap, simply because they have consistently proved worth paying a premium for. That means they could be just the thing to add to your watch list at a time like this. The list is in the latest issue of MoneyWeek, out tomorrow. If you're not already a subscriber, subscribe to MoneyWeek magazine.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.