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Can I make money during this stock market sell-off?

Stylised graphic showing falling stock prices around a hand holding the Australian flag.
A plunge in stocks provides strong buying opportunities. (Source: Getty)

Given the way financial markets are behaving, I can’t blame anyone for asking questions like these: “What’s going on with stock markets?” “How worried should I be?” And, “What action should I take?”

While many people I know are afraid, I suggest you tone down your fear and even see this as a buying opportunity because some quality companies are out there at bargain-basement prices.

Also by Peter Switzer:

Too much fear and speculation

Right now, there’s too much fear that central banks will dish out too many interest rate rises and cause a recession.

But remember: this isn’t fact, it’s speculation.

However, markets are driven by speculation in the first instance but, eventually, they have to face reality. And that’s when it’s often concluded that a big buyer surge was based on excessively positive expectations.

Right now, the reverse of this is happening.

Either way, for the long-term player there’s value in the beaten-up stocks.

For those with the courage or knowledge to see this, one day in the future they’ll be glad they became buyers.

View from someone who studies markets

Here’s the view of the market-respected Professor Jeremy Siegel of the Wharton School at the University of Pennsylvania.

“We’ve had bigger shocks in the past,” Siegel said on CNBC’s Squawk Box.

“There may be another 5 per cent - who knows, there may be another 10 per cent - but that means for me, moving forward, that just raises the return on the market looking forward.

“Hold in there. If you’ve got cash, begin to employ it. You won’t be sorry a year from now.”

I’m of the same view as the professor but you have to hold your nerve and buy when you see quality companies drop in price.

And it does take courage and confidence to do this. Value hunters who hold a longer-term view are bottom-fishing. This means they’re buying good companies at low prices.

While no one knows when the overall market sentiment will change, one thing’s for sure: it will change.

Like me, AMP chief economist Shane Oliver thinks we can avoid a recession and that central banks will engineer what’s called a “soft landing”.

And if they do, stock prices will start rising again. I’m forecasting that later this year, we’ll see a nice rebound in stocks.

If you don’t know how to pick quality companies that are mispriced, you could invest in an exchange-traded fund with ticker codes of A200, IOZ and VAS, which give you 200 or 300 of our top companies in one trade.

And if the market index goes up 10 per cent or 15 per cent with the expected rebound that I’m predicting, then you’ll pocket that gain, along with a dividend of 4 per cent or more.

That’s close to 20 per cent in a year. Even if it takes two years for me to be right, you’d still be getting an annual return of 10 per cent, which is a pretty good pay-off for betting on, or investing in, some of Australia’s best listed companies.

A chart showing the performance of the All Ords from 1970-2009.
(Source: provided)

The blue line in the chart above shows how someone who invested $10,000 in 1970 and then let those gains and dividends snowball until 2009 (one year after the stock market collapsed 50 per cent with the GFC) saw that $10,000 become $453,542.

Despite big sell-offs like the one we’re seeing now, if you’re patient and stay the course, you can make a lot of money out of taking a ‘punt’ on quality stocks (but I do put emphasis on the word “quality”).

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