Have a strategy when the jitters hit
A key task for a Financial Planner is to help clients with investment discipline. The discipline to stick with a strategy when the only thing wrong with it is that markets aren’t providing the positive returns wanted.
Studies have clearly demonstrated the propensity for investors to lock in negative or inferior returns because short term volatility encourages them that they need to act. Perhaps to escape back to cash in case markets get worse, or alternatively to chase an alternative investment choice which isn’t currently experiencing negative returns. Not yet.
In reality I don’t need a formal study to know that this happens – there is plenty of anecdotal evidence in our own community to support the proposition. Ultimately it’s an outcome of being human and an inherent difficulty in staying committed to the longer term. We react to what is in front of us. Which is ironic when likely the financial plan has a focus on accumulating to age 65 (lets assume that is several years or more away) and then potentially for up to 30 years or more in retirement. Definitely not a short term endeavor, but we react anyway.
The studies have focused on share market investment. The investor buys as optimism abounds and sells as market sentiment changes and they focus on short term losses. Buy high and sell low. It’s interesting that if a local retail shop has a sale it’s a good time to buy. When share markets (or other markets) are having a sale many investors stay away and then step in when prices are going up.
An interesting way to make a profit. And yet so many investors use this approach.
And while the original decision to invest in a strategy containing shares was presumably based on the investor not needing to access funds for some time they think ‘if only’.
Warren Buffet, one of the richest men in the US as a result of his share market investment skills has said “Our capital markets are simply a reallocation centre. They relocate wealth from the impatient to the patient”.
An interesting thought.
How then is patience to be achieved? Either through ignoring the value of one’s investments altogether or by learning and understanding. Both options will work although the first one is often hard to achieve. And ignoring does have some risks - therefore review remains important given our lives as well as the outside world can change.
Knowledge may not provide total comfort with negative market movements but at least understanding will help build the patience which leads to investment success and lessen the likelihood of decisions that destroy wealth rather than create it.
2019 was a very good investment year. And returns have been largely positive for some years now. I can’t tell you that 2020 won’t be another good year. But I can get you thinking about how to react if market turbulence should arrive.
Studies have clearly demonstrated the propensity for investors to lock in negative or inferior returns because short term volatility encourages them that they need to act. Perhaps to escape back to cash in case markets get worse, or alternatively to chase an alternative investment choice which isn’t currently experiencing negative returns. Not yet.
In reality I don’t need a formal study to know that this happens – there is plenty of anecdotal evidence in our own community to support the proposition. Ultimately it’s an outcome of being human and an inherent difficulty in staying committed to the longer term. We react to what is in front of us. Which is ironic when likely the financial plan has a focus on accumulating to age 65 (lets assume that is several years or more away) and then potentially for up to 30 years or more in retirement. Definitely not a short term endeavor, but we react anyway.
The studies have focused on share market investment. The investor buys as optimism abounds and sells as market sentiment changes and they focus on short term losses. Buy high and sell low. It’s interesting that if a local retail shop has a sale it’s a good time to buy. When share markets (or other markets) are having a sale many investors stay away and then step in when prices are going up.
An interesting way to make a profit. And yet so many investors use this approach.
And while the original decision to invest in a strategy containing shares was presumably based on the investor not needing to access funds for some time they think ‘if only’.
Warren Buffet, one of the richest men in the US as a result of his share market investment skills has said “Our capital markets are simply a reallocation centre. They relocate wealth from the impatient to the patient”.
An interesting thought.
How then is patience to be achieved? Either through ignoring the value of one’s investments altogether or by learning and understanding. Both options will work although the first one is often hard to achieve. And ignoring does have some risks - therefore review remains important given our lives as well as the outside world can change.
Knowledge may not provide total comfort with negative market movements but at least understanding will help build the patience which leads to investment success and lessen the likelihood of decisions that destroy wealth rather than create it.
2019 was a very good investment year. And returns have been largely positive for some years now. I can’t tell you that 2020 won’t be another good year. But I can get you thinking about how to react if market turbulence should arrive.
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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.
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First published in the Timaru Courier on 13 February 2020, as 'Have a strategy when the jitters hit.'
