Posted on: 5th Jul 2012
Remember why you invest.
If you’re like most investors, you began your investment programme with the intent of achieving any number of goals, some long-term, others shorter-term – such as enjoying a comfortable retirement, sending your children to university, buying a second home, or supporting your current lifestyle.
You have invested to steadily build and preserve wealth over decades. Your long-term strategy did not include trying to jump in and out of markets based on short term performance.
Brief and explosive spurts of volatility, both positive and negative, is the norm. But an impulsive investor who abandoned the market, during one or more of its sharp downturns may have missed strong, ensuing rebounds.
Understand the Risk of ‘Market Timing’.
When it comes to investing, what’s the biggest risk of all? Market risk? Company risk? Interest-rate risk? Credit risk? Inflation risk?
For many investors, the biggest risk is the risk of losing money.
Because losing money can provoke a powerful reaction, some investors turn to market timing: buying or selling based on future price predictions.
A Few Days Can Make a Big Difference.
But choosing when to invest, or ‘time’ the market, is difficult. Investors who attempt to time the market may run the risk of missing periods of exceptional returns.
For example, using the FTSE100 as a proxy for the domestic equity market, if an investor missed just the best 10 days during a 20-year period, over half of the profits would be lost. Missing the best 20 days eliminates almost all of the profit. Missing the best 30 days produced a -1.4% return, and missing the best 40 days extended this loss to -3.2%.
Clearly market timing can seriously diminish long-term performance, if market volatility isn’t managed properly. On the other hand, volatility provides professional investors with the opportunity to buy and sell on behalf of their clients at attractive prices.
Nobody ever got on a rollercoaster expecting a smooth ride.
It’s the same with investing. Over long periods of time, the financial markets can be remarkably steady but in the short run, sharp spikes in share prices is normal.
This volatility triggers a bumpy ride for investors – some of whom may be tempted to pull out of their investments and wait for the market to regain its footing.
But is moving assets from your current portfolio to what you think are more stable, ‘safer’ investments really a good idea. Amid such uncertainty, what can you do to keep your cool and avoid making potentially costly, emotionally-driven decisions?
Haven IFA Ltd can help.
We have access to portfolios designed to manage investment risk, limit volatility and maximise returns in various market environments.