Avoiding bear market mauling

IN many of my client meetings I have a conversation about rational versus emotional investing.

Given the ongoing volatility that we continue to see with investment markets, I feel that it is appropriate to share these conversations in this article.

Rational investors are those who understand that market volatility is a natural part of the market cycle.

They understand longterm investing and are prepared to ride out shortterm market volatility with the big picture in mind.

Rational investors often seek out professional financial advice before making any changes to their portfolios.

Emotional investors generally try to avoid market volatility.

They may change their portfolio based on short-term performance rather than longterm financial goals.

Emotional investors tend to react to media, or friends and family responses, rather than seek professional financial advice. There are a number of emotional stages in the market cycle. At the start of the cycle investors are optimistic about their potential to generate wealth.

As markets continue to rise (in what’s called a bull market) investors see positive returns on their investment. This can lead to a stage of excitement and potential euphoria.

It can also lead to overconfidence and some investors continue to invest large sums under a false belief that positive returns will continue indefinitely. This is the point in the market cycle where there is the greatest risk of loss.

Investors may act irrationally and take on a higher level of risk than they would normally be comfortable with.

When markets change, as they always do, there can be a period of denial where investors believe market performance will improve.

Often fear and panic follow and this can lead to a feeling of depression. It’s at this stage of a bear market that emotional investors may be tempted to sell some of their investments. However, this can also be when the greatest opportunity for growth exists. As markets become more positive, some hope returns to investors and this leads to a renewed period of optimism.

The best way to achieve your long-term financial goals is to stick with your investment strategy and not attempt to time the market.

You will see your portfolio go through a number of market cycles over your lifetime, experiencing periods of both positive and negative returns.

If you have an adviser they should always be happy to discuss investment market cycles with you and assist you to become a more rational investor.