As you’ll know if you’re a regular reader, you have to keep your emotions out of influencing your investment decisions.
The markets reward discipline. Even in a downturn, you have to remain patient and tune out the noise.
Admittedly, it is awkward to review client portfolios when they are in negative figures. But we all have to endure this short-term pain because the historical perspective shows that the long-term scenario WILL be better.
We give this message of reassurance all the time, but clients still ask the question: “I’ve got cash, but markets are down so where should I invest it?”
There’s a famous quote by Ken Fisher:
Time in the market beats timing the market
Have a look at this diagram and you’ll see that not much happens in the same year as the crisis happens. By year 3, the market has started to grow. And by year 5, it’s delivering even better returns. If you sell because of a crisis, you will miss out in the long-term.
Here’s more evidence. This chart shows all the ups and downs over time. As you’ll see, there are more bull markets than bears, so the position ends up positive overall.
Your new year’s resolution
Investors are their own worst enemy. They get returns that are worse than the market because they get frightened and they tend to buy high and sell low.
When markets go up, people tend to invest halfway between optimism and elation.
At a time like this when markets are lower, people start to feel fear and start selling.
As you can imagine, the easiest way to go broke is to rinse and repeat this cycle.
By buying and selling at the wrong times, the average investor in equity mutual funds underperformed the S&P500 by 4.76% in 2016. (That’s the US equivalent to the FTSE in the UK.) They only got 7.20% when they could have got a return of 11.96% by doing nothing all year, and spent the time going out to lunch instead.
Bad returns are because of investors’ own poor behaviour. So here’s a good new year’s resolution for you – behave better! That means you just have to stick it out.
For more information, please watch this brief video by Dimensional.