I checked my stocks and shares ISA on Friday morning last week and everything was fine.
On Monday afternoon I checked again and things looked much worse.
Markets fell on both sides of the weekend as some poor US jobs numbers and the lack of a rate cut by the Federal Reserve combined with the Japanese yen and the stock market having one of their periodic mini-fits.
That didn’t do my ISA investments any favours, but the crucial mistake I made was searching in the first place.
Storm Riders: It may not be the giant wave of Nazaré, but investors should channel their inner big-wave surfer and stay calm while riding the market waves.
Even in the best-case scenarios, reviewing your investments two business days in a row runs the risk of encouraging you to engage in poor investment behavior.
Doing so when you know the market is down is tempting fate to the extreme.
Fortunately, I avoided the temptation to start experimenting: selling things that had collapsed, switching to “safer” investments after the horse got away, etc.
My quick check on Monday (the one I knew I shouldn’t do) revealed the extent of the damage was a few thousand pounds off my wallet.
However, this is only theoretical damage. I know I am investing for the long term and I consider myself to have a relatively high tolerance for investment risk, so I am happy to be 100% in stocks.
And while my stocks and shares Isa aren’t quite back to where they were last Thursday, they have at least benefited from some of the rally since Monday.
Markets don’t go up in a straight line and there will always be days of big declines, so I have to expect this to happen and be willing to ride it out; if anything, I should use days like Monday as an opportunity to buy stocks while they are on sale.
Still, there is always that nagging doubt.
The voice in your head that says, “What if this is the big deal? Wouldn’t it be better to get out now?”
As an investor, it is important to ignore that voice and pay attention to its existence.
You should ignore it when it encourages you to make hasty decisions, but you should also recognize it if it is so strong that it causes you stress, because that indicates that you are not happy with the risk of your investment and in a calmer and more sensible moment it may be wise to tone it down.
The FTSE 100 is far from the best performing stock market in recent years and has had some ups and downs, but it has recorded long-term share price growth.
Sharp declines worry investors, but corrections are a natural part of markets. Some of the biggest declines in history fade into relative insignificance on long-term charts, particularly if you look at total returns and not just stock prices.
The FTSE 100, for example, is far from the best-performing stock market over the past 25 years and has certainly suffered some major falls since the dotcom crash, but trying to be clever and sell into one of those falls and miss out on the rally would have cost investors dearly.
Meanwhile, check out the FTSE 100 Index Total returns and things look much better than the share price-based index. In share price terms, the FTSE 100 is up just 11 per cent over five years, but in total return terms it is up a much more respectable 33 per cent.
Of course, if you only invest in the FTSE 100 you are doing things wrong.
The UK market represents just 3.4 percent of the global stock market, as measured by the MSCI All Countries World Index: less than Apple (4.35%), Microsoft (3.94%) or Nvidia (3.91%).
This means that British investors should be careful not to bet on the British stock market, otherwise they would be betting big. Instead, investing globally has generated better returns: the MSCI ACWI index is up 77 percent in five years.
The declines fade much more when looking at the long-term chart of the global stock market.
The most important thing investors should do is avoid panic moves, which can lead to selling at the bottom and missing out on a rally.
Zoom Out: The past 15 years of total returns for the MSCI indices: ACWI includes developed and emerging markets; World is developed markets only; Emerging Markets is developed markets only
Six tips for investors looking to calm nerves
Do nothing: Typically, the best course of action is not to react to market sell-offs. Studies repeatedly show that individual investors underperform the stock market because they tend to react poorly and sell when stocks are down and buy when they are up.
Don’t constantly check: Investing is long-term, so reviewing it daily is a recipe for trouble. If you’re looking at your portfolio and feel compelled to act, don’t do it right away. Step back, talk to someone about what you’re thinking of doing, or write it down – evaluate it carefully and consider whether it’s the right decision.
Recognize your emotions: Greed and fear are emotions that trigger rash investing behavior, but it’s natural to feel them. Accept that these feelings when you see markets plummeting (or rising) are part of human nature, but remember that you can control your reaction.
Don’t put all your eggs in one basket: Investors are told to diversify for a reason. A diversified portfolio will still fall, but it can protect you when market storms come. Don’t get too much exposure to one stock, fund, sector or market. And remember, investing in ten companies that do similar things is not diversification.
Invest regularly and think long term: Regular monthly investing allows you to grow your portfolio steadily and avoid sudden market swings that can affect your invested amounts. Studies show that the longer you invest, the lower the chance of losing money in a given period.
Be brave when others are afraid: Consider market declines as an opportunity to buy investments at lower prices. Turn the situation around and think of the stock market as being on sale, rather than thinking of your investments as being in crisis.
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