DIY Investor Toolkit: history shows for those willing to take a long-term perspective that sharp, short-term dips end up being a mere footnote in the grand scheme of things.
When financial news makes the front pages of the broadsheets, 99% of the time it is for the wrong reasons. But when headlines state that billions of pounds have been wiped off stockmarkets, it is important to keep a cool head and take the long view, rather than acting on impulse and converting paper losses into real losses.
The Brexit deadline is a case in point, with doom and gloom predications for stockmarkets in plentiful supply. One recent example is a “stress test” study by the MSCI, the index provider, which paints a gloomy prognosis for investors should the UK opt to leave the European Union without a deal. In short, it predicts a 15% decline for UK shares (the timescale is not specified); if this materialised it would cause plenty of panic.
However, as history shows, for those willing to take a long-term perspective such sharp dips end up being a mere footnote in the grand scheme of things. Indeed, at times of stockmarket turbulence, it is worth remembering that volatility is part of the deal in investing in equities. It’s the price investors pay for the fact that over the long run, putting money into shares rather than leaving it in cash will yield greater rewards.
As Money Observer has stressed previously, the number one rule of investing is to simply invest for the long term and follow the old adage that success is based on “time in the market, rather than timing the market”. Various pieces of research endorse this approach, including recent number-crunching by broker Willis Owen, which finds that since 1986 investing for 10 years has generated a positive return 98% of the time.
If that does not convince you to resist the temptation to sell when markets fall on bad news, then it is well worth considering drip-feeding into the market. A regular plan, involving investing at the start of every month for example, does away with the risk that you might put all your cash into the market just before a nasty dip, which is easily done when everyone is bullishly buying shares too, as anyone who lost money in the dotcom crash of 2000 will tell you.
In addition, as Andy Parsons, head of investments at The Share Centre, points out, it’s useful to bear in mind that stockmarket volatility brings about opportunities. “The Warren Buffett quote, ‘be fearful when others are greedy and greedy when others are fearful’, is possibly opportune when markets are volatile. For many, the natural reaction is to sell, while for those with a keen eye and stomach for turbulence, volatility can create a buying opportunity,” he says.