Five investments mistakes we make in market downturns
Here’s how to stop your heart sabotaging your investments
In times of volatility, investors are their own worst enemies. They panic, sell at the bottom and then try to get into the market again at the wrong times. At times like this, having an expert hand on the tiller can prevent you from making classic mistakes that will affect your investments in the long term.
Here are five of the biggest mistakes we make in market downturns, and how to counter them.
Selling at the wrong time
When the stock market tumbles, it can be frightening to look at the value of our investments. Behavioural scientists calculate that we feel losses twice as keenly as we value gains1, and this can skew our thinking. But if we sell when the market falls, we risk crystallising our losses, when the reality is that if we had kept our nerve for longer, the price would have recovered. At the time of writing, the FTSE 100 has rebounded from lows below 5,000 as the coronavirus crisis took hold.
Holding your nerve can be tricky as a DIY investor, but a financial adviser is able to be dispassionate about your investments, looking at the fundamentals of the investment rather than the price.
Trying to time the market
As well as selling at the wrong time, investors often try to buy at the wrong time as well - waiting until they can see what they think is ‘the bottom’ before buying. But as the old adage goes, “it’s time in the market, not timing the market that counts”, and studies bear this out. Research from Morningstar2 shows that even if you’re good at picking the ups and downs of the market, staying invested is a better strategy than jumping in and out. Investment experts can help with this.
Taking on too little risk
It’s easy to flee to the perceived safety of bonds or precious metals at a time like this, but financial advisers understand the importance of a balanced and diversified portfolio. Those with too much bond investment risk missing the boat when the equity market recovers.
Following the crowd
Herd mentality won’t make you rich. Advisers rely on expert research instead to put together a portfolio that matches your individual risk tolerance - not someone else’s.
Thinking short term
If you don’t need your money for ten years or more, then the current value of your investments is not relevant. Instead, your adviser will help you to dripfeed money in gradually, ensuring that you benefit from lower costs per unit while the market is low. In the long term, you’ll weather this storm.
To find out how financial advice could help you make better investment decisions, speak to one of our independent financial advisers. A first meeting is free and there’s no obligation to continue.
The information in this article is for generic purposes only and is not intended to suggest a suitable investment strategy. All investments carry a degree of risk which means that you could receive back less than your initial investment amount. You should seek financial advice before proceeding with any course of action.