When investing, it is important not to react to market falls. Dr Benjamin Holdsworth warns of the error which will affect your long-term investment success.
Being an investor is never easy because, as humans, we tend to live in the moment, responding to our emotions, the environment around us and the circumstances we find ourselves in.
That has served us well as a species helping us to survive, but as investors we need to remain focused on the long-term goals we have and not what is going on in the day to day, month to month or even year to year of the markets.
Historic market data shows that, if we listen to this noise, we would spend most of our time being afraid of markets instead of embracing them for the returns that taking on sensible risks should deliver.
Short-term market falls are frequent and a normal part of investing. Any investor looking to profit from these movements would need to have some amazing form of 20-20 foresight to predict when they might happen.
They would also need to act in advance of them happening and then get back into the market again at the appropriate time.
Simply reacting, post-event, to market falls will invariably be a losing strategy. In reality, at any point in time, all of the information held by all investors trading in markets is reflected in current prices quite efficiently.
Prices will therefore move only on the release of new information, which is, by definition, a random event.
As the Nobel Laureate Prof Robert Merton recently stated: ‘If the market is disagreeing with me, or doesn’t seem to be aligned with me, that could be that I know things the market doesn’t, but it also could be that the market knows things I don’t.’
Investors were reminded in 2022 that bond returns can go down as well as up. The same challenge in terms of reacting to falls in bond markets applies. In almost every year, bond markets fall from a mid-year high.
Trying to time when to be in or out of bonds – and presumably into cash – could result in eroding away the benefits that a sensible structure of short-dated global bonds hedged to Sterling has the opportunity to provide for those focused on their true investment horizons.
Remaining focused on your long-term goals, staying invested and rebalancing regularly are the key drivers for a simpler life and the likelihood of better investment outcomes.
Dr Benjamin Holdsworth is a director of Cavendish Medical, specialist financial planners helping consultants in private practice and the NHS
The content of this article is for information only and must not be considered as financial advice. Cavendish Medical always recommends that you seek independent financial advice before making any financial decisions. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The value of investments and the income from them can fluctuate and investors may get back less than the amount invested.