The S&P/ASX 200 Index (INDEXASX: XJO) is down by around 17% since 20 February, triggered by fears of the growing seriousness of the coronavirus outbreak.
With a lot of investors spooked, let's step back to look at what's happening and examine where you should go from here.
Market volatility is a normal part of investing
While travel and tourism have been hit particularly hard, with the likes of Qantas Airways Limited (ASX: QAN) and Flight Centre Travel Group Ltd (ASX: FLT) seeing sharp share price falls, no market sector has been immune. Everything from ASX bank shares such as National Australia Bank Ltd (ASX: NAB) and ASX healthcare shares such as CSL Limited (ASX: CSL) have been impacted.
It's very important to keep in mind that the kind of market volatility we're experiencing right now does happen in markets from time to time. On average, the ASX share market corrects (i.e. falls by at least 10%) around once a year.
Shares can go down in the short term. However, if we look at the history of the share market over the past century, it shows us that the market always bounces back eventually.
I will acknowledge that this current correction is turning out to be quite a severe one. However, many investors tend to forget that we're coming off all-time highs on the ASX and we have had a very solid 10 years of gains since the GFC. So, a significant market correction is not surprising.
Biggest single mistake that investors make
Likely the biggest single mistake that share investors make is to sell due to fear that the market will fall even further.
In fact, if I look back over the past 25 years of my share investing experience, the biggest mistake I ever made was to sell good quality shares for the wrong reasons.
Learning to control your emotions with share investing is, I would say, the most challenging part. The more experience you gain with share investing, the easier it becomes to do this.
Have we hit the bottom of the market?
I would love to be able to give you the answer to that, but the truth is nobody really knows.
Many financial analysts make these kinds of predictions, and I think a significant reason for this is that their clients typically expect this type of 'supposed' value-added analysis.
The real truth, however, is that there are just too many variables involved in investing, from a very wide macro-economic level right down to a granular company level, to be able to make any reasonable sort of prediction.
What we know for certain: Shares are now better value
What we do know for certain, however, is that with share prices down significantly on what they were a couple of weeks ago, the price-to-earnings (P/E) ratios of most shares are now lower. This means shares can be purchased at much more favourable prices.
On average, if you add together the average capital gain and average dividend return from shares including franking credits over the past few decades, then shares have returned an average of 10%.
Foolish takeaway
Nobody really knows when we will hit the bottom of the current market correction. What is certain is that the market now offers better value than it did 2 weeks ago.
I would advise staying calm, continue investing as you always have, and consider purchasing shares at more favourable prices.
Shares always have the great advantage of providing capital gains despite any short-term volatility like we're witnessing now, provided that you have a long-term investment horizon. This would mean being in the market for a minimum of 5 to 7 years.
