“If you want to panic, make sure that you panic first” has never been a bad idea when investment markets go into free fall. However, this type of nimble reaction could mostly be ascribed to an extraordinarily well developed sense of market timing or more likely, pure luck.

For long term investors, with a focus on building a portfolio of high quality investments, severe short term losses (even if only on paper) can be very disconcerting and induce a belated panic sell reaction – just to see the stock price bounce back shortly after the sale.

So, what shall we make of the current market mayhem? Here are some ideas that may help you decide on your plan of action:

• A long term perspective removes the short term noise

Equities tend to move up over time. Between 1927 and 2014, U.S equities provided an annual return of 9.8% per year. This was considerably better than any of the other major asset classes including bonds and cash.

• Equity investments hold little risk for long term investors

Equities are often considered to be a risky asset class, unsuitable for low risk or retired investors. Critics will readily point to the dramatic declines in U.S. and other global equity markets between September 2007 and March 2009 when the S&P 500 lost over 50% of its value.

Nevertheless, it is worth pointing out that, for those investors who held their nerve at the time, the total loss in the U.S market was recovered within 4 years with the current value of the S&P 500 almost three times higher than at the market bottom and 30% higher than at the pre-crash peak.

The evidence presented in the table indicates that equities hold little risk for long term investors. It is only traders and those with short investment horizons that need to be fearful of market volatility.

For investments into U.S dividend paying equities with holding periods longer than 5 years, the risk of capital loss is less than 10%, for holding periods longer than 10 year, less than 5% and zero for holding periods over 15 years. For shorter holding periods, less than 1 year, the risk of loss dramatically increases up to 40%. Remember that these statistics relate to a well-diversified portfolio, not to individual stocks.

Source: Fama and French

• Focus on high-quality dividend paying stocks – the Dividend Champions

Severe market corrections are an integral part of the normal behaviour of investment markets. As unpleasant as these events may be, they do provide the opportunity for long term investors to add quality companies to their portfolios.

There is no way of knowing how far the current correction may run – remember we have had an extended bull run which left many company valuations stretched. However, with some of our Dividend Champions now available at higher dividend yields than before, and with a considerable likelihood that they will continue to pay and grow the dividends for years to come, I am inclined to add some of these stocks to my personal portfolio on “panic” days like today.

Our full Dividend Champion portfolio is available on this link (https://www.investingdaily.com/canadian-edge/issues/current/). If you wish to add some of these stocks to your portfolio, you may wish to focus on the stocks with the higher portfolio weights and higher quality ratings first.