An often overused quotation from investment guru Warren Buffett is “…try to be fearful when others are greedy and greedy when others are fearful.”
Ignoring for a moment that the full Buffett quotation refers to occasions when investors insist on trying to time their participation in investment markets; on a day when the FTSE 100 index of leading company shares fell by 4.67%, it seems appropriate to reflect on these sentiments.
Finishing the day at 5041.61, down 246.80 points, this was the single largest percentage fall in value for the FTSE 100 in over two years.
UK investment markets were not alone, with the CAC 40 in France falling by 5.25% and the German Dax falling by 5%.
Despite market volatility, now might be considered a good time to invest in equities.
Depending on your appetite for investment risk and your investment time horizon, a big fall in the value of shares can be viewed as a scary experience or an opportunity to buy companies at a big discount.
Looking at the FTSE 100 again, the index is currently trading at a price-earnings ratio of 9.68. To put this in context, FTSE 100 companies have an average p/e ratio of around 13. In other words, some analysts might conclude there is value to be had currently.
Whilst equity markets are falling, other constituent parts of an investment portfolio should be behaving differently. This ‘negative correlation’ should see fixed interest securities in particular travelling in the other direction.
The ability to be ‘greedy when others are fearful’ is never easy, particularly when the headlines are describing only the fear.
With a long-term outlook and an ability to accept investment risk, market volatility might not be the barrier to investing it is first assumed to be.
