I came across this article today from fellow Financial Planner, Dennis Hall, and thought you’d find it an excellent read in light of the current volatility of the stock market.
Here it is reprinted in full.
Top Ten Tips for Worried Investors
Are you worried about the markets? Thinking of cashing in your chips at the investment casino? It’s been a dreadful year for most investors, and the last few weeks have been particularly dire. It’s easy to say we’ve been through similar periods yet they provide lessons for riding out the current storm.
Here is a reminder of some the bad times we’ve previously experienced
- The last oil crisis leading to a severe bear market during 1972 – 1974,
- then there was Black Monday – 19th October 1987 – when the US Dow Jones market lost one quarter of its value in a single day,
- the Asian currency problems of October 1997 leading to the collapse of Long Term Capital Management, the hedge fund that nearly created global meltdown,
- the collapse of the technology bubble that bottomed out in October 2002.
We’ve put together a list of Ten Tips to help you through this storm.
1. Stay Calm
All of our clients have been through a psychometric risk tolerance questionnaire and the resulting portfolios have been constructed in accordance with the degree of risk that can be withstood, both emotionally and financially. So if you’re one of our clients; stay calm!
2. Keep your Eye on the Bigger Picture
The big picture doesn’t come to fruition this year or next year. The goals and objectives that we have set are generally further ahead, and investment volatility is already factored into the plans.
3. Market Timing 1
According to Anthony Bolton, (one of the UKs most successful fund managers who ran the Fidelity Special Situations Fund) the overwhelming majority of investors fared poorly compared to the overall returns from his fund. He blamed this on investors becoming spooked and selling out of the fund during bad times, and buying in during good times. Investment success has more to do with “time in the markets” rather than “timing the markets”.
4. Market Timing 2
Remember, markets can recover almost as quickly as they can fall. On the 19 October 1987 the
5. Remember Diversification
Not everything will fall at the same time; conversely not everything will rise at the same time. Property and shares are two asset classes that have taken large falls over the past year. On the other hand cash and government bonds, which were perceived as dull, are proving to be the better performing assets in an investment portfolio. Portfolios need a spread of different asset types to help weather the downturns.
6. Rebalancing
Markets that go down eventually rise, and likewise those that go up eventually fall. A diversified portfolio provides some protection against falling values but it is prudent to rebalance the portfolio at regular intervals. This involves taking profits from assets that have risen, and reinvesting into assets that have fallen. There is no hard and fast rule about when to rebalance, the largest
7. Make Rational Decisions
Greed and fear are the two devil-emotions of the market – you either control them or they control you. Greed dominates the good times and we hold rising investments longer than we should; whereas fear presides over troubled times. Over time markets revert to their mean rate of return. Simply tracking the market through good times and bad times should provide long term returns consistent with the long term average, in the case of UK equities this is 9.92% per annum (ignoring charges).
“We simply attempt to be fearful when others are greedy and greedy when others are fearful” – Warren Buffet
8. Crystalise Gains, not Losses
Selling near the bottom – or even in a falling market – will simply create a loss. The market is a zero sum game, for every seller there is a buyer, for every winner there will be a loser. I have watched investors for over twenty years and those that have held their nerve and adhered to basic principles have tended to do well. I am in danger of repeating myself, but buy when others are selling, and sell when others are buying, and hold steady when all around you are losing their head.
9. Avoid Noise
Turn off the financial news and stop reading the finance pages, if for no other reason than it’s depressing! TV, radio and newspapers have to fill space every day, and news, commentary and conjecture helps them do it. It matters less to them if they’re wrong, after all tomorrow is another day and they can say something different. Also remember that we’re conditioned to find information that supports our views and beliefs, be careful what you expose yourself to.
10. Don’t Worry in Silence
These are difficult times and you may understandably be feeling nervous. If you are one of our clients and want to talk about it please pick up the phone. Because our service is around coaching and education we support you through difficult times as well as good times, it’s not about selling you the next “hot” investment.
