Holding steady as markets fluctuate.

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The last quarter of 2018 was negative for shares – particularly overseas markets. Occasional volatility is normal but as usual there were voices suggesting the end of the world had arrived and media reported that investors were ‘draining’ money from share funds in the US, with $46 billion being withdrawn in one week in early December.

Were those withdrawals a reaction to falling markets? I suspect many were. And I wonder how much of that money was reinvested for the recovery in January. A relatively small portion I suspect.

It is important to acknowledge that most of us suffer some level of frustration or concern during negative periods and that this is normal. Successful investment however is the ability to ride out those periods. If our reaction is to want to sell perfectly good investments simply because markets are down then we need to consider whether we should reduce the size of our share investments, which tend to be more volatile. The offset of course being that we also reduce our return potential.

Legendary investor Benjamin Graham, who was called the Dean of Wall Street, invented Mr Market to teach us about share markets.

Mr Market is a friendly fellow who comes every day and offers to buy the shares we own or to sell his shares to us. But sadly for him he has incurable emotional problems. At times he feels euphoric and can see only the favourable factors affecting the business. When in that mood, he names a very high price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions, he will name a very low price, since he is terrified that you will unload your interest on him. You can buy or sell or you can ignore him since he will come back with an entirely different offer tomorrow.

The key message is that share markets exist to serve you, not to guide you. If Mr Market shows up one day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence and take his views for your own.

In reality, the last month of positive returns doesn’t mean the recent volatility is behind us. We’ll know the answer to that one when we look back at the end of this year. But if we have an appropriate mix of investments for our age and situation then being consistent and not trying to time in and out of markets is likely the best answer.

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Stephen McFarlane is an adviser with NZ Funds Private Wealth in Timaru. The opinions expressed in this column are his own. A copy of Stephen’s Disclosure Statements are available on request, free of charge.
First published in the Timaru Courier on 14 February 2019, as 'Holding steady as markets fluctuate.'

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