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Characteristics of successful investors in turbulent markets

Are you the embodiment of the ‘keep calm and carry on’ mantra? Or are you the kind of person who tends to see a mountain instead of a mole hill?

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • The importance of discipline and patience.
  • How to stay focused.
  • The tools to help you pre-commit your investment plan.

Our lives are always full of unforeseen events. Some of these can be really positive, like that chance meeting with someone who later becomes your partner. Often they can be negative, like losing your job through redundancy. How we react to being thrown one of life’s curve balls is down to our personality and can reveal the issues we may face when managing our investments. Are you the embodiment of the ‘keep calm and carry on’ mantra? Or are you the kind of person who tends to see a mountain instead of a mole hill?

Turbulent markets are one such curve ball that is thrown to get in the way of maintaining your financial Zen. They can cause strong negative reactions such as fear and panic. Some investors seem to take this in their stride, and even see opportunity in volatility (sudden market movements), others are more prone to becoming stressed. Irrespective of their emotional reaction investors who are able to maintain discipline and patience tend to be successful.

The importance of discipline and patience

A recent study1 has provided some evidence that investors reactions to market volatility can be predicted by how in control they feel of their financial lives. Those who feel least in control appear to be most dissatisfied with periods of volatility.

Taking a disciplined approach to investing can provide the feeling of control that helps navigate turbulent markets. It is a little more than having a plan and sticking to it. It starts with assessing what you are doing outside of investing. Do you have a pot of accessible cash savings as an ‘emergency fund’? Having this in place helps avoid being forced to sell your investments at a time that wouldn’t have been of your choosing. Our own research shows that having enough cash to cover emergencies is a big determinant of financial wellbeing no matter how much you earn.

It’s then important to have an investment plan which you can stick to. However, having a plan is often not sufficient on its own. Just as the temptation of a sweet treat is the downfall of many well-intentioned dieters, turbulent markets can erode the willpower of many investors to keep to their plan. Staying disciplined isn’t easy. Anxiety and panic can make it difficult to do the things you planned.

Similarly, just as the dieter wants to see weight loss, an impatient investor wants to see progress towards their goals quickly. Turbulent markets can often make you feel like your goals are actually getting further away and at times of stress we tend to prefer to take control of a situation by doing something. There’s greater comfort in trying something that fails than failing by not doing anything.

Staying disciplined and patient

If you aren’t the kind of person who is naturally more sanguine about things, a disciplined and patient approach to investing will be more difficult. One of the best ways to tackle this is to commit to a series of future decisions which then take place automatically. This overcomes any lack of discipline during turbulent markets because our planned actions occur without needing to do anything. Even better, because you are pre-committing to do something, you can make your decisions when markets are calmer and you are less stressed.

There are two great tools for pre-committing to your investment plan: regular investment contributions; and dividend reinvestment. With regular investment contributions you pre-commit to adding to your portfolio each month. The market conditions don’t come into the decision. In some months the markets will be doing well and in some months they won’t. Importantly, this disciplined approach lowers any temptation to try and pick the bottom of a turbulent market.

Find out more about the benefits and drawbacks of making regular investments

Depending upon your portfolio, dividends can arrive at various times during the year. They take a bit of management to decide what to do with them and they may sit there a while not earning the returns (or suffering the losses) the rest of your portfolio is. It’s easy in turbulent markets to delay making a decision about where to reinvest your dividends – that may work in your favour if markets fall but works against you if you aren’t confident enough to judge the signals that the turbulent period is over. Choosing automatic dividend reinvestment means that your cash is put straight back into investments and overcomes any inertia in your decision making. Your cash will start to earn the returns you expect of the rest of your portfolio over the longer term rather than sitting on the sidelines waiting for you to make a decision.

Remember, any investment comes with risk of loss and there's always the chance you'll get back less than you expect, or less than you invest.

Remember, the value of investments can fall as well as rise and you could get back less than you invest. We're not recommending Ready-made Investments as being suitable for you based on your personal circumstances. If you're unsure about this investment’s suitability for you, you should seek independent advice.

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