Staying calm in the current climate isn’t easy, let alone having the courage to put any spare cash you might have to work in the market.
For those brave souls out there, however, it’s worth remembering that what you don’t do is often as important as what you do.
With this in mind, here are what I believe to be the three worst mistakes to make in the current crisis.
1. Picking the bottom
The need to ‘buy low and sell high’ is drilled into every investor from the outset. Unfortunately, some take this to the extreme and try to time their buys and sells to reap the maximum benefit. This is usually, and somewhat ironically, a complete waste of time and energy.
Not only is consistently timing the market virtually impossible, but it’s also unnecessary. Huge wealth can still be made even if you don’t buy at the absolute low. In fact, star fund manager Terry Smith frequently points out that the purchase price contributes relatively little to eventual investment returns. Far more important is what the companies you buy actually do to grow in the years ahead. Hence his preference for buying high-quality firms and simply trying not to overpay.
If investing a lump sum feels too scary (understandably so these days), take advantage of the brilliant tool that is pound cost averaging. Buying regularly helps smooth out periods of price volatility.
2. Changing your strategy
The optimum investment strategy for you is the one you can adhere to regardless of prevailing economic conditions. Unfortunately, a market crash can bring out the worst in us, to the point where we end up compromising potential returns.
In practice, this means previously risk-averse market participants suddenly wanting to invest in anything that might generate quick gains. They jettison solid, established stocks from their portfolio. And they go for those that have fallen so low that they’re ‘guaranteed to recover’.
On the flip side, previously risk-tolerant people become overly-cautious. And they opt for only the most defensive investments, if any at all. Perhaps they might move into assets such as bonds, which history has shown to return far less than equities over time.
The message here is simple: don’t let greed or fear take over. Stick to the plan you made in calmer times.
3. Tuning in to the noise
It’s tempting to follow the news in the belief that every scrap of information you take in will benefit your performance as an investor. Personally, I don’t think this is the case. Indeed, I think monitoring developments too closely is positively damaging to your health.
There are far better things to be doing, in my view. From an investment perspective, consider drafting a list of quality stocks you’d like to buy. I’d look for companies that have shown to be resilient in the past. They would have a competitive edge, be financially sound and/or have highly competent management teams.
There’s also a lot to be said for getting away from it all, particularly if you’re prone to getting emotional when looking at your portfolio’s performance. Shut your laptop, go for a walk — keeping your distance, naturally — and remember that the market has faced many, many tests in the past.
None of those proved fatal to the market. Neither will this.
