How to be a well-behaved investor
When it comes to investing, it’s easy to let your heart rule your head. But the golden rule is not to be too hasty. We’re firm believers that the longer you stay invested, the greater the chance you have of enjoying better returns.
Let’s take March 2020, for example. Retail investors sold funds worth £10bn in just one month, with many selling just as the stock market was falling to its lowest level in eight years. Understandable, perhaps, given the circumstances, but not really the most sensible behaviour. They missed out on the subsequent market bounce of almost 30%. Hindsight is a wonderful thing, but over time markets do tend to bounce back – though, of course, there are no guarantees.
An investment strategy for success
At Fortitude, we always discuss and agree upon an investment strategy with our clients; and then encourage them to stick to it through good times and bad. Research from US-based Morningstar backs this up as a sensible approach. They looked at the ‘performance gap’, the difference between the return of an average mutual fund and the return that the average investor in that fund experienced.
The study found a significant difference between the returns achieved by the fund and the returns achieved by the investors in the fund. The study concluded that it was because investors were trying to chase winners (moving into well-performing funds after they’d shown strong performance) and dumping funds that hadn’t performed so well.
What drives your decisions?
There are many reasons why people respond differently to changes in the market. Much of it has to do with objectives, how tolerant they are to risk, their beliefs, preferences and emotions, even their past investment experiences. If there’s a market fall, some people stop investing until the markets stabilise again. Others will think it’s better to sell in case it’s an early warning sign of a downturn. Someone with a different mindset might even see it as an opportunity to invest. Whilst one type of behaviour might lead to success on occasion, it might also be counterproductive in the long term.
Why it’s often best to do nothing
If the markets are volatile, invariably our advice is to exercise caution, sit tight and wait for everything to get back on an even keel. As humans, it’s all too easy to have a knee-jerk reaction to certain situations. So the answer is to follow a set process that prevents you from making any hasty decisions.
The disciplined, robust and in-depth investment process that we use at Fortitude is designed to give clients the confidence to stay the course, even when market extremes occur. There’s no point trying to time or play the market because, in most cases, the market plays you.
If you’d like to know more about how our process can help safeguard your investments, get in touch.