Ride out the ups and downs in a volatile world

THE stock-market correction of early February was closely followed by another one in March making the first quarter of 2018 a jittery period for many investors.

Firstly, it was fears of swifter than expected interest rate rises causing the setbacks and more recently it has been increasing concerns over a US-China trade war as well as a sell-off in the technology sector.

It has all left investor sentiment as low as it has been for many a year and market volatility certainly looks to be back with a vengeance.

For example, the days from 22-26 March saw moves for the Dow Jones Index in the US at an average of 559 points. This compared with the whole of 2017 where the daily average move was just 68 points and where there was only three days with a move of 300 points or more.

Which is where we get into investor psychology. A certain amount of volatility can be a good thing. Yes, there may be a downside, but it can also throw up opportunities. Shares that are dumped by the lemmings headed off the cliff can be picked up cheaply.

Yet, many investors just can’t get it round their heads that losses are at times bound to happen – it is how you deal with them which is important.

What is your strategy? Where is your plan?

In an article last month in Investopedia, commentator Brian Bloch summed it up like this: “There will always be ups and downs, overheated stocks, bubbles, mini-bubbles, industry wide losses, panic selling in Asia and other unexpected events in the market.

“Provided your investments make sense in the first place and are well managed, losses are simply inevitable to some degree and in some situations.

“It is necessary to take them in stride and react prudently, dispassionately and strategically. Either let the relevant markets right themselves over time, as they often do, or rebalance and restructure according to the well-proven principles of asset allocation and fund management.”

He cites the main errors in trading as:

■ Attempting to win back losses by taking on more risk than you can afford or are comfortable with.

■ Taking on so little risk that you cannot possibly make any money in the long run.

When stock markets tumble all too often investors can act emotionally and irrationally.

You get the herd mentality, panic buying and panic selling.

The overconfident are usually the ones hurt the most especially if there has been a long bull market – an ethos develops that this can never change and the only way is up.

Almost mesmerised, hiding your head in the sand ostrich-style, is another symptom – the sooner you get to grips with the problem the better. The dilemma is whether to cut and sell or stay put, never an easy decision amidst the turbulence.

Long term investing is the key and, in the oft quoted phrase, don’t get too carried away in the good times or too down in the dumps in the bad times.

Make sure you have a diversified portfolio based on companies with strong fundamentals.

Don’t try and call the market – not even the experts can do that with any certainty.

Successful investing requires a level-headed, patient and long term approach. Due diligence and thorough research is a must.

The truth is that people tend to take losses far more personally than they do gains.

Horse racing enthusiasts tell you when they have had a decent win, but you never hear a word when they lose. When it comes to investing, it is the steady Eddies that ride out the waves.

Don’t try and call the market – not even the experts can do that with any certainty