FEA­TURE

WE RE­VEAL THE TOP TIPS THAT CAN HELP YOU KEEP A COOL HEAD

Shares - - CONTENTS -

How to take the emo­tion out of in­vest­ing

It has been a volatile year for global eq­ui­ties as trade wars, geopo­lit­i­cal crises and Brexit ne­go­ti­a­tions have all soured in­vestor sen­ti­ment. It can be tempt­ing to fol­low the herd and sell when things go sour or buy when ev­ery­one is con­fi­dent, but in­vestors should avoid act­ing im­pul­sively and in­stead fol­low a clearly thought through strat­egy.

Un­for­tu­nately, this is eas­ier said than done. In this ar­ti­cle we talk to the ex­perts about how peo­ple can adopt a prac­ti­cal re­sponse to in­vest­ing and avoid emo­tions cloud­ing their de­ci­sion mak­ing.

IG­NOR­ING YOUR IN­NER EEYORE

Fear can of­ten play a part in rash in­vest­ment de­ci­sions, es­pe­cially in light of trau­matic ex­pe­ri­ences with long-last­ing ef­fects such as the fi­nan­cial cri­sis in 2008.

‘Try to put the de­press­ing head­lines into per­spec­tive, ig­nore your in­ner Eeyore and con­front your fears with ra­tio­nal ex­u­ber­ance,’ ad­vises 7IM se­nior in­vest­ment man­ager Dr Alessan­dro Lau­rent.

Fo­cus­ing on fear and the worst out­comes are clearly bad for in­vestors hop­ing to keep a cool head, but what strate­gies can peo­ple adopt to avoid act­ing on nat­u­ral emo­tional re­sponses?

Po­ten­tial strate­gies in­clude build­ing a di­ver­si­fied port­fo­lio, buy­ing low and sell­ing high, as well as avoid­ing tim­ing the mar­ket.

One of the best ways in­vestors can guard against volatil­ity is di­ver­si­fi­ca­tion by spread­ing their money across var­i­ous as­sets, in­clud­ing eq­ui­ties, com­mer­cial prop­erty and cash.

Hav­ing too much money in one area is dan­ger­ous ac­cord­ing to Chase de Vere com­mu­ni­ca­tions head Pa­trick Con­nolly.

Un­der­per­form­ing ar­eas can neg­a­tively hit fi­nances and lead to ir­ra­tional de­ci­sions such as sell­ing out after losses have al­ready been made – or in­vestors can be too op­ti­mistic and take on too much risk.

DON’T TRY TO TIME THE MAR­KETS

Drip feed­ing cash de­ters peo­ple from try­ing to time the mar­ket. James Ham­bro fi­nan­cial planner Charles Calkin warns against tim­ing the mar­ket as it is ‘no­to­ri­ously dif­fi­cult.’

‘Try to re­mem­ber that bub­bles al­ways burst

and mar­kets are good at pick­ing them­selves up off the floor, even when they look un­con­scious,’ com­ments Calkin. For this rea­son it is of­ten said that ‘time in the mar­ket is bet­ter than tim­ing the mar­ket’.

When mar­kets are fall­ing it is easy to let your emo­tions take over, mak­ing you ner­vous and re­luc­tant to put money into shares.

In the short-term this might pro­tect you from losses, but you could also miss out on re­turns when stocks re­bound. By in­vest­ing on a monthly ba­sis, you will be well po­si­tioned for a re­cov­ery when it comes.

An­other good strat­egy is to reg­u­larly re­bal­ance fi­nan­cial port­fo­lios. The idea is to pe­ri­od­i­cally sell as­sets that have gone up and buy more of those that have fallen, in or­der to get back to a more bal­anced al­lo­ca­tion to­wards dif­fer­ent as­set classes.

This helps to keep a more con­sis­tent level of risk ex­po­sure, and also en­cour­ages the dis­ci­pline of sell­ing as­sets that have ap­pre­ci­ated and buy­ing those that may have be­come rel­a­tively and tem­po­rar­ily un­der­val­ued.

DON’T LOOK TOO OF­TEN

Eq­ui­ties can ex­pe­ri­ence sharp moves with some global mar­kets suf­fer­ing de­clines on the back of fac­tors out­side of in­vestors con­trol such as po­ten­tial trade wars and the di­rec­tion of in­ter­est rates.

For in­vestors, it can be scary see­ing a sec­tor out of favour or de­clines in global stock mar­kets.

One way to avoid the emo­tional roller­coaster of short-term volatil­ity is to not look at your port­fo­lio ev­ery day.

Calkin be­lieves in­vestors will be hap­pier (and po­ten­tially wealth­ier) by leav­ing their port­fo­lio alone – as long as it is well bal­anced and di­ver­si­fied.

WHY PAS­SIVE FUNDS COULD BE A SMART OP­TION

Con­nolly be­lieves peo­ple can of­ten try and pick out­per­form­ing funds if there is a lot of hype or if it is led by a star man­ager.

This can be a risky move as peo­ple can be­come emo­tion­ally at­tached to funds, mak­ing it more dif­fi­cult to make log­i­cal de­ci­sions.

By choos­ing a pas­sive fund, in­vestors are less likely to try and pre­dict whether it will out­per­form or un­der­per­form and will also ben­e­fit from lower charges. (LMJ)

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.