How investors can prepare for rising fears of share market slump

It’s a worrying time for share investors - May is traditionally one of the worst months - but here are the five best tips to handle a slump.

It’s been a shaky start to what is often viewed as the worst stretch of the year for stockmarket investors.

Australian shares fell last week following the surprise Reserve Bank interest rate rise, increasing interest rates overseas, more US banking woes and rising fears of recession.

The popular stock market saying, “sell in May and go away”, appears to have some traction in 2023. Share specialists often argue that May-to-October is traditionally weak for shares, which often only show life again after bogey-month September.

May itself has been one of the worst months over the past decade - especially if you strip out 2020’s Covid crash rebound - with only September a scarier time for investors.

While I’ve seen the “sell in May and go away” line wheeled out a few times lately, in truth it’s actually incorrect – at least if you look at stockmarkets over the past five years.

Since 2018, the Aussie sharemarket has climbed three out of five years between May and October.

But what about Britain and the US, where the saying originated and has the biggest believers?

Also wrong: in Britain, it was three out of five, while US stocks climbed in four of five times.

Forecasters say stockmarket pain may be coming soon.

There’s one myth busted, but what about the big worry on investors’ minds – that things are about to get painful?

Sadly, that may be true, as investment experts warn of potential weakness ahead.

Morgan Stanley Wealth Management says globally were are seeing economic growth lose momentum faster than expected, a stall in the war on inflation, and worsening company earnings.

AMP head of investment strategy Shane Oliver says shares are at risk of another rough patch. “Recession risks remain high,” he says.

IG market analyst Tony Sycamore said his “gut feel” was that the ASX 200 index – currently trading near 7200 points – would find buying support at 6900, but if it broke below that the index could decline to 6400.

While there’s a chance of a sharp fall, markets also could rally back to record highs, because they love to surprise us.

If you’re worried about short-term pain, consider these five important rules championed by successful investors and advisers.

1. DIVERSIFY

The best way to ride out investment storms and smooth out returns is to own a variety of assets in a variety of sectors and countries. That means spreading money across shares, property, cash, infrastructure, perhaps with some fixed interest and alternative assets too.

2. AVOID PANIC SELLING

In previous sharemarket collapses, such as the 2020 Covid crash and the Global Financial Crisis in 2008 and 2009, the biggest losers were those who panicked and sold out at the bottom of the market. They missed the inevitable bounce-back, crystallised their paper losses and have regretted it since.

3. LOOK TO THE LONG TERM

Billionaire investor Warren Buffett famously declared “our favourite holding period is forever”. While that may be a stretch, share investors should aim to hold stocks for at least 7-10 years. They will experience booms and busts, but should emerge safely out the other side.

4. FOCUS ON QUALITY

Strong companies with a history of rising profits and dividends will always outperform the latest investment fads. Plunges in buy now, pay later stocks and crypto illustrate this perfectly.

5. BE GREEDY WHEN OTHERS ARE FEARFUL

Part of Warren Buffett’s most famous quote, it’s wise to buy when stockmarket sentiment is at its worst. The problem is we don’t know when the bottom strikes, so it’s good to invest in parcels every month or so, spreading your risk.

Originally published as How investors can prepare for rising fears of share market slump