Act rationally in the face of market turmoil

5th August 2011

I am sure you must have seen some of the recent coverage of the investment market turmoil.

You need to know that markets, stock markets in particular, go up and down. Sometimes these changes are in response to actual changes in markets or companies but most large movements are in response to changes in sentiment. Markets move because investors act as a response to fear or greed rather than using logic or economic analysis.

It is important that you do not buy or sell in response to an emotional reaction.  A recent study in the US showed that whilst average returns in the market were 11.9% pa (1985-2004) the average mutual fund investor received only 3.7% pa because they reacted emotionally.

Markets have fallen because investors are fearful. Although there is good reason to have fear in the short term, no-one knows what will happen to markets tomorrow, as long as your long term strategy dictates your investment planning there should be no real reason to react with fear, the markets will recover, they always do. The question is just how long this takes to happen.

In the words of Warren Buffet, the world’s richest man and financial guru “when all around you feel fear – be greedy, when all around you feel greed – be fearful”.

As long as you have a long term plan, stick with the markets and do not worry about them!

If you have any queries or concerns or would like to discuss your particular circumstances, please get in touch.