Friday was a scary day for investors around the world.
Australia's own S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) was one of the first markets to respond to the Brexit news as it became increasingly likely that Britain would vote to leave the European Union.
Shares of businesses such as Commonwealth Bank of Australia (ASX: CBA) and Wesfarmers Ltd (ASX: WES) were hit hard, while businesses that are more exposed to the UK market such as BHP Billiton Limited (ASX: BHP) and Clydesdale Bank plc (ASX: CYB) were hit even harder.
The ASX 200 ultimately ended the day 3.2% lower, with international markets also experiencing extreme volatility that evening and into Saturday morning.
Timing the market is inherently difficult, if not impossible, to do with any form of consistency, but it would be naïve to assume the hard part is over. Share markets could and likely will remain volatile at least in the near term as investors respond to the shock and reassess their tolerance for risk.
But while some investors will respond to that through fear and panic, others should keep these four things at the forefront of their minds:
- Remember, volatility is normal. Okay, it's not every day that a country leaves the European Union. But volatility itself is a normal part of investing and is indeed what has allowed shares to generate stronger returns than almost any other asset class through history.
- Remember, share markets have survived numerous disasters before. Motley Fool columnist Morgan Housel reminds us that over the last 140 years, the share market has survived and prospered through numerous disasters, including (but not limited to):
The assassination of three US presidents; flu pandemics; nine major wars (including World War I and World War II); the words 'economic pessimism' have appeared in the newspapers at least 29,000 times according to Google, and U.S stocks lost a third of their value at least 12 times. - Keep some cash handy. Having some cash spare is always wise. For one, you don't want your entire wealth exposed to the market in case conditions do worsen, while you also want to have some cash ready to be put to work when opportunities arise.
- Don't panic. When we panic, we can tend to lose rationality. In the coming days or weeks, there could well be some forced sellers in the market, which could push share prices lower. If or when that happens, don't join them in frantically selling: remain calm and try to keep your emotions in check.
BONUS: Be on the lookout for great buying opportunities
Investors should keep in mind that many of the world's greatest investors will be licking their lips right now at the prospect of a heavy sell-off. This isn't because they enjoy losing money, but rather the exact opposite!
During times of heightened uncertainty, shares can get sold down in the short-run giving long-term investors an opportunity to pick up great companies at cheaper prices. Of course, not everyone will feel comfortable putting more cash to work in the current environment, but do yourself a favour and at very least be on the lookout for some great buying opportunities – there are sure to be some in the coming days or weeks!
