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.

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 .

Our recommended articles for today

Should you buy shares in Greggs?

The fallout from the government's proposed 'pasty tax' has left bakery chain Greggs under a cloud of uncertainty, with its share price depressed. Phil Oakley asks if the shares are a buy, or if Greggs is now one to avoid.

Why the UK shouldn't fear Greece quitting the euro

We're told that Greece leaving the euro would be 'a disaster' for Britain. But is that true? Matthew Partridge looks at what a Greek exit would really mean for the UK.

Recommended

Tech stock sell-off may be a good signal
Stockmarkets

Tech stock sell-off may be a good signal

The tech-stock-heavy Nasdaq index is down 15% since its November peak. But what’s bad for tech investors might be good for society as we move into a p…
28 Jan 2022
Shareholder capitalism: the world’s most powerful asset manager wants you to have your say
ESG investing

Shareholder capitalism: the world’s most powerful asset manager wants you to have your say

Under shareholder capitalism, the owners of the companies the big fund managers invest in are us – yet our voice is rarely heard. Now one asset manage…
26 Jan 2022
Julian Brigden: markets are at a huge inflexion point
Investment strategy

Julian Brigden: markets are at a huge inflexion point

Merryn talks to Julian Brigden of Macro Intelligence 2 Partners about the unwinding of the US stockmarket's super-bubble, and the risks and opportunit…
25 Jan 2022
Has growth investing had its day? Don’t be so sure
Growth investing

Has growth investing had its day? Don’t be so sure

Markets – and “jam tomorrow” growth stocks in particular – continue to crash, with some analysts forecasting a 50% drop or more. But, says Max King, a…
25 Jan 2022

Most Popular

Amazon halts plans to ban UK Visa credit card payments
Personal finance

Amazon halts plans to ban UK Visa credit card payments

Amazon has said that it is to shelve its proposed ban on UK customers making payments with Visa credit cards.
17 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022