Why volatility hurts
We are generally able to recognise in ourselves two main emotional responses to market movements: worry, as a market rises and panic, as it falls. Speed these gyrations up and even the most placid of us can start to feel uneasy.
Thanks to the likes of Thaler and Daniel Kahneman we now know that we experience the pain of a loss twice as much as the joy of a gain, so the distress we feel at the thought of the former means we’re only human.
However, the best investors neither celebrate nor commiserate too much or for too long. Instead, they understand that volatility is the price we pay for the long-term outperformance of equities over cash. Keeping that long-term view at the front of your mind should help you look at short-term fluctuations as nothing more than mere blips on a much longer journey.
“Uncertainty is actually the friend of the buyer of long-term values.”
We could quote Buffett a hundred times over, with reference to keeping a cool head when everyone else is losing theirs. Rather than running for the hills, he suggests we have a look to see what Mr. Market is offering us in the sales.
If you are firmly behind your investments then dips give you the chance to grab a bargain so don’t get spooked, get buying.
In general, actively managed funds gain the chance to prove their worth in choppy environments because they are designed to pick the winners at the right prices and leave out the losers, à la Buffett. A passive approach, by definition, reflects the broader market, giving you access to the laggards as well as the best opportunities.
If you don’t trust yourself to spot the diamonds in the rough, it might be an idea to let your fund manager do it instead.
Batten down the hatches?
One of the best ways to subdue any palpitations if the markets move suddenly is to get your house in order before anything actually happens.
Adequately diversifying your portfolio with a range of assets is a basic principle of long-term investing. If the environment changes, it’ll be too late to start chopping and changing so get it sorted beforehand to make sure some cylinders are firing at all times.
It’s all about minimising the risk that you’ll act rashly under pressure, so sometimes the best thing to do is nothing. Setting up a monthly contribution to your investments means the highs and lows average out over the long run. It might not seem like it but this approach really can be the best, and it will stop you fiddling out of fear.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.