The two-year anniversary of Black Monday (24 Aug 2015), when global stock markets endured their biggest one day fall since 2008, is fast approaching.

The significant and widespread sell-off began 10 trading days earlier, when the FTSE 100 was around the 6,700 mark, and was prompted by fears over the health of the Chinese economy.

Those nagging concerns persisted into the early weeks of 2016 and ultimately the FTSE 100 slumped to 5,700 by February that year. Since that low the index has recovered to hit new record levels above 7,500.

Traders on the beach

It is no coincidence this extreme volatility occurred during the summer months. Just like everyone else, stock market traders and institutional investors tend to take their holidays in July and August.

Volumes thin out when these market professionals are away and it can take a small number of trades by less experienced counterparts, who have not necessarily been through the ups and downs of the financial markets and the economy, to move shares in either direction.

The mounting debt bubble in China was a large contributor to the market panic in 2015 and it has still not gone away. Harvard economics professor Ken Rogoff recently warned China’s reliance on debt will eventually trigger a market shock and also warned of the potential risks to the economy posed by the Trump administration.

So what should you do if there is a similar sell-off to two years ago in the near future?

For most of us the answer is absolutely nothing. Research produced by asset manager BlackRock shows if you missed just the best five days on the FTSE All-Share between 1995 and 2015 you would have reduced your final pot from an initial investment of £10,000 from £45,519 to £31,316.

If you missed out on the best 15 days you would have halved your paper profit. Missing the best 25 days left you with just £13,506 – scant reward for more than two decades of putting your money at risk in the stock market.

Best follows worst

As illustrated by the trading patterns which followed the China-inspired meltdown of late 2015 and early 2016, some of the best days can follow the worst as bargain hunters take advantage of depressed valuations. If you sell when the market is in free-fall you crystallise your losses and miss out on the chance to participate in rebounds.

As such, having some cash ready to take advantage of any market wobbles could prove a wise move.

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