Don’t let emotion wreck your portfolio.

Be a MINDful money-maker

FORGET for a moment, i f you possibly can, recent memories of horrible dividend cuts and nasty stock market corrections – stark features of the investment year to date.

Instead, if you are investing in the stock market, try to focus on the long term. If you can do that, you stand a much greater chance of achieving your investment goals – whether it’s building a nest egg for retirement or a fund to use as a home deposit in the future.

According to investment experts, too many investors allow their emotions to influence the way they run their portfolios. As a result, they often lose out, either by selling at the wrong time or buying when the market is surging – just ahead of a stiff correction.

All the numbers confirm this. For example, earlier this year, when everyone started talking of an impending lockdown and the stock market fell sharply, many investors decided enough was enough. They ran for the exit door.

Statistics from the Investment Association show that retail investors (you and I) disposed of investment fund holdings to the value of close to £10 billion in March – everything from Isas to fixed income investments and equity funds.

Many sold their investments just as the UK stock market was hitting its lowest level for nearly eight years. In so doing, t hey missed out on the subsequent market bounce of nearly 30 per cent. Fear proved costly. James Norton is senior investment planner at investment house Vanguard UK and says investors are naturally driven by both fear and greed. He adds: ‘It’s perfectly understandable. If markets fall as they did earlier this year, many investors are minded straightaway to protect what they have. That means selling their investments.

‘Equally, when markets are rising like in the late-1990s during the socalled technology bubble, more investors want a slice of the action. Many people, from taxi-drivers to hairdressers, suddenly have an interest in stocks and shares.

‘Of course, it all ended with the stock market crash of March 2000.

‘Emotion is a powerful tool – but not when it comes to investing.’ It is a view shared by Moira O’Neill, head of personal finance at wealth manager Interactive Investor. She says: ‘There’s a very good reason why few of us make great investors – and it’s called human emotion. Fight or flight is the instinctive response to a threatening situation which readies us to either resist forcibly or run away.

‘It is an instinct that can also play out when stock markets are volatile, as they were early this year. Investors panic and sell, sometimes unfortunately having bought at the top of the market.’

Lucy Coutts, investment director at wealth manager JM Finn, believes emotion should play no role in investment decisions. She says: ‘Any decisions we make are clouded by emotion: good or bad, fear or greed. A friend of mine recently sent me a text with the acronym FOMO – ‘fear of missing out’.

‘I responded by saying that such an emotion has no place in investing. Whether provoked by fear or greed, it is impossible to time your entry into – or your exit from – the market perfectly.’

Data from asset manager Fidelity International highlights the potential damaging effect emotion can have on investment returns. Analysing returns from the FTSE All-Share Index over the past 20 years, it reveals that someone who has remained invested over the period would have received an annual return of 4.01 per cent, turning an original investment of £1,000 into £2,195.

But if they had missed the ten best days of stock market performance, their annual return would have been far more modest, at 0.66 per cent. Miss out on the 20 best market days and the annual return becomes a loss of nearly 1.5 per cent.

Maike Currie, investment director at Fidelity International, says lockdown and the coronavirus pandemic has perpetuated the ‘emotional’ buying and selling of shares, when, in fact, a more ‘pragmatic’ approach would have proved financially beneficial.

She says: ‘When uncertainty prevails, people are minded to put most of their wealth under the mattress. They feel pressurised to do so – emotions take over and behavioural biases crop up.

‘Yet, as investors, we should be more pragmatic. As Covid-19 has proved, we c a n’t predict t he future. It turned the world upside down.’ Currie’s view is that staying invested throughout times of stock market volatility is the best long- term strategy to adopt. To prove her point, she says that someone who had taken full advantage of their annual Isa allowance over the past ten years – investing every month – would now be sitting on a fund worth £170,553 if their money had been invested in the FTSE All-Share Index.

This compares with a total investment of £149,160 – an overall return of 14 per cent. The figures, she says, highlight why ‘taking a longterm view and allowing time for investments to recover and recoup losses is so important’. She adds: ‘However tempting it might be to jump out of the market now, it’s time in the stock market which really makes all the difference.’

Meanwhile, Vanguard’s Norton believes four key principles underpin successful investment: setting goals, ensuring balance within an investment portfolio, keeping down investment costs, and being disciplined.

As for goals, he says it’s essential to invest with an idea of what you want to achieve – for example, building a retirement fund or a sizeable lump sum to support a child through university or help them with a house purchase. ‘The goal must be realistic,’ he says. ‘It will also determine how you structure your investments.’

Any investment portfolio, he adds, must then be diversified with a mix of equities and bonds. Holdings must also not be exclusively UK based. ‘Most investors have a home bias, but they should realise that plenty of quality companies exist outside of the UK and are accessible via investment funds.’

Norton says investment costs should be kept to a minimum – for example by using low-cost investment funds. Finally, and most importantly, investors need to ignore all the noise, stay disciplined and keep invested. ‘Staying the course was the mantra of the late Jack Bogle, founder of Vanguard,’ says Norton.

‘It is a mantra that is as pertinent today as it ever was. You don’t get long-term investment rewards without experiencing market volatility along the way.’

The last words go to Laura Suter, personal finance analyst at wealth manager AJ Bell and JM Finn’s Coutts. Suter says: ‘It’s really hard not to let emotions get in the way of investing – after all, it’s your money you’re dealing with. Instead, try to be objective. Forget market timing – even the professionals fail to get it right all the time – and invest on a regular basis.’

All online wealth managers allow investors to set up regular investment plans, enabling them to buy specific shares or funds on a monthly basis.

Coutts says investors with longtime horizons tend to do best. ‘Accept that there will be bumps along the way which will be uncomfortable. But ultimately, t hey should not matter if you sit tight.’

She adds: ‘If you buy good companies – with unique qualities or strong brands that generate lots of cash and reinvest a slice of their profits back into their businesses – these should stand the test of time.’

The message is clear. Stay invested. Sideline fear and greed. jeff.prestridge@mailonsunday.co.uk

As Covid-19 has proved, we cannot predict the future Stay invested... and sideline both fear and greed