We live in a world where access to the capital markets is easier and cheaper than it has ever been before. Individual investors can trade shares, funds, ETF’s and many other assets with the click of a button. However, just because access to markets is easy, that does not mean the same is true of investing.
The process of investing is inherently difficult. Not because access to markets is challenging but because questions such as those below are often not simple to answer:
- What investments do you choose?
- What is your aiming point or goal?
- How will I know if I am wrong?
- When does a short-term correction become a full-blown bear market?
- How much should I invest in each investment?
- How do I fund my future cash needs?
All of these are legitimate questions that must be answered if you are to succeed in your investing endeavours.
There are periods of time when investing can be straight forward, in that you can simply follow the general pattern of the stock market. For example, the UK market from 2003 to 2007 or 2012 to 2015. The market was trending higher, economic growth was positive and inflation was relatively low. What is not to like? This is easy, right? The issues arise when markets stop trending and start being volatile, which happens more often than you might think. A cursory glance at the FTSE 100 over the last 10 years reveals a number of market corrections that could easily have continued into full-blown bear markets. By this author’s count, there have been at least 10 market falls of significance, with 8 out of those 10 equating to a fall of more than 10%.
What do you do now? You need a long-term view, discipline, the time and expertise to do your research and above all, strong judgment. Let’s take our 2003-2007 example. At that time the FTSE 100 had a relatively high weighting in financial and banking stocks that had performed well for several years. As the financial crisis grew and investors realised the scale of the subprime loan problem, banking stocks fell sharply, as did the wider market.
What do you do at this point, without the benefit of hindsight? Is this the time to ‘pile in’ and grab a bargain? Or is this the time to run for cover? As profits are eroded and begin to turn to losses, do you crystallise the loss? There are often mental or psychological barriers around crystallising losses which can blur investors’ judgment. Some investors prefer to wait for a rally which either never comes or arrives but only after a further sharp fall.
It is during the tough times such as 2007-2009 (and several other occasions since) that we value advice, research and being able to share our ideas with others. I have said to clients on many occasions that ‘investing can be a lonely place’ – something that is as true today as it has been in the past. Going with the crowd is not always the route to long term success. You need your own judgment, set of values and nerves to invest and importantly, to stay invested in the tough times as well as the easy ones.
I have often thought that investors make their money when they buy, not when they sell. This may seem counterintuitive but let me explain – if you have the good judgment and strength of resolve to invest in something at a time when others do not understand its value, you may be off to a good start. Further, you then need the strength to remain invested until that value is realised, at which point you may produce attractive profits. However, that is easier said than done. That journey is not as simple as it may appear. Along the way, there are bound to be setbacks. Your judgment around whether you ‘see it through’ or perhaps to acknowledge that the investment idea has not worked can be a very difficult call to make.
Part of any investor’s journey is the continual learning process – the more we invest, the more time we spend in the markets, the more we learn. Key to this is treating your investing activities like a business. Investing is sometimes made out to be a game or a bit of fun, and for some clients it is- they have a small proportion of their overall wealth set aside for their own investing ideas. However, for the bulk of your investable assets, this needs to be treated like a business. As with any business, you can be the owner, but you do not need to be the operator. That is a conscious choice you are able to make, thanks to the wide variety of investment services offered in the UK.
I would like to end this article with three tips that I hope are of interest to you in your investing endeavours:
- Be clear about your values, approach and goals. This is the foundation to your investing journey. Like a house, if your foundations are not solid, the building on top is not likely to stand the test of time
- Know when to do nothing versus doing a lot- this comes with experience but is greatly helped by having a deep understanding of what you are invested in. it is your money and your responsibility, so minimise surprises by knowing your investments well
- Do not bow to peer pressure- there is something called the ‘herd mentality’ in investing. This is the idea that ‘everyone else is doing it, so I should too’. This condition can persist for some time however it rarely leads to good long-term results, but tends to cause short term distractions
I hope this article has been of interest to you on your investing journey.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.