Resist acting in haste when markets wobble

14 May 2020

5 minute read

In uncertain and turbulent times such as these, it can be increasingly difficult to stick with investment plans and avoid taking unnecessary action. Here, we consider how best to resist the temptation to do something.

Who's it for? All investors

The value of investments can fall as well as rise. You may get back less than you invest.

What you’ll learn:

  • How regularly tweaking your portfolio can cause more harm than good
  • Taking action may feel empowering but may not always be the best option
  • Investing is a long-term activity and requires riding out the short-term jitters.

In uncertain and turbulent times such as these, it can be increasingly difficult to stick with investment plans and avoid taking unnecessary action. Our bias towards wanting to do something rather than letting events unfold is understandable, but before we do we should consider if it serves us well. A large body of research shows that, for individual and institutional investors alike, the more you do with your portfolio the more harm you are likely to cause to long-term returns.

Danger: Accident Ahead

Cast your minds back to the days before lockdowns were in place across much of the world, it may seem like a long time ago now. A driver on a motorway suddenly comes to signs warning of an accident ahead. What does he do? Any driver can attest that the thought of taking the next possible exit and finding another route is all too tempting. In reality, warning signs lag behind the actual incident. We don’t know how up-to-date the information is and so the road ahead may be much clearer than we fear. This doesn’t stop drivers from taking instinctive action by exiting onto side roads and suffering the consequences of lower speed limits, indirect routes and now much increased traffic. It may feel empowering to take action, even when we know it may not be the best option.

Analogous to the motorway signs is the information we look at to guide our investment decisions. Financial markets are forward looking so they price in expectations about the future of the economy and investments, rather than today’s situation. Unless vastly different from these expectations, the real-time economic data you see on your investment journey, for example new unemployment benefit claims, are unlikely to move markets. This means that prices, like traffic, can and do rebound just when the available information seems gloomiest.

Herd it here first

To continue the motorway example above, how many of us have seen a car divert following a warning sign and blindly followed suit? Perhaps we assume they have some knowledge of a better route. Ironically, once one driver takes action by seeking an alternate route, many others will follow, resulting in congestion and even slower progress.

The same can be said about markets where investors can behave like lemmings, panic buying or selling depending on the course of action they believe has been taken by their peers. It is important to remember that investing is a long-term activity, and requires riding out the short-term jitters to avoid becoming a speculator. Think about the context of your investment horizon and the longer term drivers of returns before simply throwing yourself off the proverbial cliff.

Scratch the itch

Given the increasing health and business implications of the current situation, investments may be the last thing on people’s mind. However, for those relying on their invested assets for income or spending their capital, the market turmoil may be adding to their sense of anxiety.

One potential solution is to take some action, which may help you feel in control, but make sure longer term investment goals are not sacrificed as a result. You could think about delaying any sizable expenditure or trimming regular expenditure. You could also consider rebalancing your portfolio; this requires a bit more resolve as you will be buying into assets that have fallen in price but maintaining your risk level is sensible behaviour.

It is worth remembering that deliberate inaction is still a decision, and a perfectly appropriate one for long-term investors.

Where to invest

To best navigate the current market uncertainty, we would advocate taking a long-term diversified approach to investing. The Barclays Ready-made Investments are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These multi-asset funds invest across a range of asset classes and regions, offering a globally diversified one-stop solution for investors. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone.

Smart Investor offers a wide range of funds, and our Barclays Funds List may help you to narrow down the wide range available to invest in. These funds are selected by Barclays investment specialists and, based on our research, they’re the funds that have built solid reputations and established sound investment processes.

We don’t offer personal investment advice so if you’re unsure you should seek that independently.

Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances. Smart Investor doesn’t offer personal financial advice. If you’re not sure about investing, seek independent advice.

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