It has been a tough year already for investors and we are less than three months in. After a sudden sell-off in software stocks in February, we now look to be facing an energy price shock.
Markets have followed the usual pattern of shooting first and asking questions later, resulting in heavy losses for several sectors. The question is, as a long-term investor, what is the best course of action?
Keep calm
Although it may sound counter-intuitive, to begin with the answer is to do nothing. Reacting on gut instinct when there is a sharp sell-off is rarely the right strategy.
Over the last 60-plus years there have been any number of geopolitical shocks, yet markets have continued higher. The FTSE All Share index started in 1962 with a base value of 100 and today it sits at 5,446 points.
During that time, we have experienced numerous wars from Vietnam, the Falklands, the Gulf, Kosovo, Afghanistan and Iraq to Ukraine. We have also experienced oil price shocks as a result, most recently in 2022.
And we have experienced a global pandemic, which completely disrupted global trade, yet markets have survived. A recent report by stockbrokers Killik & Co offers some insight into previous sell-offs.
Over 25 major geopolitical crises, the average market loss has been 4.7% and selling has lasted less than 20 trading days. Moreover, once the selling has stopped markets usually recover within the next 20 trading days.
Carry on
There is another feature to sell-offs which investors often don’t consider when weighing up what to do. The biggest gains typically follow days of losses, because markets can rebound quickly and without notice.
If you stayed fully invested in the FTSE All Share from January 2010 to January 2025, your average annual return was 7.6%. However, if you missed the 10 best trading days during that period, your returns were just 4.5%. Miss the 20 best trading days and your returns dropped to 2.4% per year.
What this means is you should prioritise time in the market rather than trying to time the market. Even the best investors don’t try to time the market because they accept they don’t have an ‘edge’.
Lessons from the past
What we can do as investors is learn from past crises and try to make informed judgements as to the outlook. For example, we know from past energy price shocks which sectors of the market are the biggest winners and losers.
We also know that geopolitical shocks, like pandemics, put global supply chains under immense pressure. Therefore, we need to think about the potential impact on companies which import components versus those with in-house manufacturing.
An added wrinkle to the current crisis is the importance of oil by-products as well as oil and gas themselves. As an example, most of the world’s sulphur for use in sulphuric acid comes from oil and gas refining.
Sulphuric acid plays a central role in the process of extracting copper, cobalt and nickel. All three metals are crucial for the manufacture of electronics generally and batteries for electric vehicles in particular.
Another by-product of the refining process is chemicals for use in polymers and plastics. The Middle East is a major supplier of polymers for use in food and drink packaging and clothing.
Therefore, disrupting the supply of oil and the refining process has wider knock-on effects on manufacturing. A further casualty of the current crisis is agriculture, as fertiliser supplies are at risk.
The Middle East supplies a large proportion of the world’s urea for use in fertiliser. Australia, for one, is a large customer for its feed industry, with a 95% dependency on imports.
We recommend running the slide rule over your portfolio coolly and calmly to assess your risk exposure. Assuming you’re happy, you can sit back, or you can turn the sell-off to advantage and add to your holdings.
You might also be interested in these articles:
