Characteristics of successful investors in turbulent markets

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 can be difficult to predict, in both good and bad ways. How we react to unexpected situations is crucial to how we come out the other side.

When it comes to investments, turbulent markets are one such situation. They can cause great fear and panic to some investors, which can cause some to make rash decisions. But others seem to take this in their stride, and even see opportunity in volatility (sudden market movements). Whatever your reaction may be, it is important to make sure you are not acting on impulse.

The importance of discipline and patience

A recent study¹ has suggested that an investor's reaction to market volatility can be predicted by how in control they feel of their financial lives. Those who feel the least in control appear to be the most dissatisfied with periods of volatility.

Taking a disciplined approach to investing can provide the feeling of control that helps one to navigate turbulent markets. This doesn’t mean just 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.

Although it’s important to have an investment plan that you can stick to, having a plan is often not enough on its own. Turbulent markets can erode the willpower of many investors, in the same way as, when someone is on a diet, the temptation of a sweet treat can be their downfall, despite their best intentions. Staying disciplined isn’t easy. Anxiety and panic can often change your mind and draw you away from your original plans.

Similarly, just as the impatient dieter wants to see immediate weight loss, an impatient investor wants to see immediate profit. Turbulent markets can make you feel like your goals are actually getting further away, and in times of stress, we tend to prefer to take control of a situation by doing something. To some, there can be greater comfort in trying something that fails than failing by not doing anything.

Staying disciplined and patient

If don’t consider yourself the most disciplined person, a patient approach to investing could be more difficult. One of the best ways to tackle this is to commit to a series of future decisions that then take place automatically. This overcomes any lack of discipline during turbulent markets as our planned actions happen without us needing to do anything. Even better, because you are committing to do something, you can make your decisions when markets are calmer and you are less stressed.

There are two great tools for committing to your investment plan: regular investment contributions and dividend reinvestment. With regular investment contributions, you are committing to adding to your portfolio each month and making sure that 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 (the lowest a stock price will go) of a turbulent market and eliminates acting on impulse..

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

Depending on your portfolio, dividends can arrive at various times during the year. It takes 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. This 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 delays 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 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 invest – and even with profits, less profits than you expected.

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.