The FTSE 100: should I catch a falling knife?

At FTSE 100 increase today. However, since last Wednesday it has dropped 7%. Looking at the latest high of 8,014, which was reached on February 20, 2023, the FTSE 100 is down 8%.

The explanations for why this happened are numerous and I won’t repeat them here. What I want to know is what to do when the market is not healthy.

Stock market crashes and corrections

When it comes to explaining stock market movements, there are several terms that the investment community agrees on. These are:

• Crash: a sudden drop in percentage, usually two times that occurs within an hour or day
• Correction: a decline of 10% to 20% from the new high, usually over weeks to months
• Bear market: a drop of more than 20% from the new high, usually measured over months to years
• Bull Market: a rise of more than 20% from its lowest point, usually measured over a period of weeks to months

Currently, the FTSE 100 is not quite crashing, and it is not correcting or in a bear market. But as someone who keeps the financial news, that’s how it should be.

Type “bull market” into a Google news search and 9,260,000 results are returned. Search for “bear market” and the results double to 18,100,000. Panic-inducing headlines are more common than their conversations. The bad news, apparently, is selling more. And I can use it more, whether I want to or not, compared to the more positive headlines.

Economists Daniel Kahneman and Amos Tversky found that people feel more pain losing £200 than they will be happy when they gain £200. They call this phenomenon ‘loss aversion’. The Google news search results show that headlines that warn of pain get more attention. I always find myself reviewing my portfolio when the market is down. I believe I overreact to rejection and underreact to gain.

Take the FTSE 100

according to Forbes, bear markets last 289 days and average every 5.4 years. Bull markets are longer (average 973 days) and occur more frequently. The average length of a bull market is 973 days and occurs more frequently.

The FTSE 100 price chart since 2003 supports this. Measure a move of 10% or more and gain periods are more frequent and cumulatively longer than loss periods.

Since I regularly invest my spare money, then I am more likely to buy at higher and higher prices. And I will do this quite happily. But when the market goes down, I want to stop investing. I don’t want to catch a falling knife, because I’m going to get cut, right?

Well, maybe I will. But I was able to buy at a lower price before transitioning to a rising market. That’s what I have to do. And if I have decades before I need to start drawing up my investment portfolio, I feel that way.