Don't panic during periods of global stock market turmoil.
THE volatility we are living through was not unexpected. Any investor who invests in risk-assets such as equities for the long term must expect to see periods of losses. In turbulent times our investment strategy, and our emotional control and foresight are put to the test.
When crafting a portfolio, we should think about how it would perform in the best and worst of times but we should also think about how we will react to short-term risk.
Recent weeks have shown volatile markets offer potential benefits and dangers, and have also highlighted to what degree the real danger is determined by how we react to them.
A well-known artefact of financial markets is that the shorter the period of time over which we monitor them, the more often we see losses.
So the stock market can appear extremely risky when we judge it based on any day (48% losses), week (64%), or month (70%). Over five years, the proportion of losses drops to 10%, making it seem fairly safe. During periods like August 2011 fear and the heightened feeling of short-term uncertainty can drive the market more than usual.
There is also an associated risk of market mistiming. Our research shows that jumping out of the market after a fall can seriously impair your long-term returns.
Volatile markets can feel like a call to action. We feel we must do something to take control, a propensity called 'action bias'.
Our report Risk and Rules - the role of self-control in financial decision making, polled 2,000 wealthy individuals worldwide and found the more an investor trades, the worse their net returns.
The advice we can give in periods of market turmoil will not prevent you from experiencing interim losses, nor does it guarantee high returns.
However, it can help you ensure that you are organised to react to periods of sharp market moves.
First, don''t monitor your portfolio if you don''t have to. Markets can move dramatically within a day or a week, and it is often meaningless in the long term.
Second, if you do want to take action, do it with a clear and calm mind. Let markets, and yourself, settle overnight.
Third, talk to an advisor before making a big decision. A second opinion is always valuable, even if it confirms your views.
Finally, use periods of volatility as an opportunity to rebalance intelligently. Odds are your portfolio''s asset allocation has already become more defensive, as equity prices fall and bonds rise. If you were already underweight in equities, it will have become very conservative.
The simplest investing advice has always been buy low, sell high, and increasing equity exposure right now is definitely not buying high. Equities are historically inexpensive and it''s always best to buy goods when they are on a discount. And that has nothing to do with what will happen this month or next - but will help over the long term.
Andrew Miller is regional office head of Barclays Wealth in Newcastle
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|Publication:||The Journal (Newcastle, England)|
|Date:||Aug 31, 2011|
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