Article

Keep calm when investing

Award-winning national newspaper journalist Holly Black provides her opinion on keeping calm when investing

Don't panic

"When the stock market goes up and down on a daily basis and the value of your investment with it, it can be easy to worry.

Some investors will wait out and not act during volatile periods in the market, others however will panic and sell. 

The decision to sell can largely be blamed on evolution – most of us are simply not well adapted to invest. Human beings suffer from a trait that behavioural psychologists call loss aversion, whereby we make emotionally-driven decisions because we are worried about incurring a financial loss. Studies have shown that we feel greater despair at losing £100 than we feel joy at gaining £100, and that causes us to make poor decisions.

Many people are also prone to follow the herd. In investment terms, that means we are likely to back a fund or stock after it has already made significant gains, buying at the top of the market just as the asset becomes expensive – and when it is more likely to fall.

A famous example of this is the dot com bubble of the late 1990s when the share prices of technology stocks soared as they became increasingly popular. This attracted new investors who were enticed by the returns being made, but eventually the bubble burst and those investors who had invested at a higher price were left out of pocket.

A more recent example is cryptocurrency Bitcoin, which attracted many investors after it soared in value in 2017 only for its price to plunge soon after.

With so much emotion attached to investing, it’s no wonder that many people find it difficult to stay calm and enjoy the ride, but there are a few simple steps you can take that should help you to enjoy the investment journey, even if there are a few bumps along the way."

Write a list

"Something many fund managers do when they make an investment is to write a list of all of the reasons they have made that decision, including what they like about the fund or stock, how they expect the investment to perform and what could possibly go wrong.

If you also make a list, it means that if the value falls you can check whether the reasons you had for investing at outset still stand.

A natural human tendency is to place a greater value on something you own over something you don’t, so when it comes to your investments you should try to look at them with fresh eyes and consider whether you would still buy them today if you didn’t already own them."

Risk is as important as return

"Many investors are tempted to choose risky options because of the potential gains they offer, but if you don’t have a large appetite for risk this is likely to be a mistake.

The best way to pick investments is by considering your overall goals and your tolerance for risk – there is no point choosing a racy fund if it is going to cause you sleepless nights. Doing so means you are more likely to panic and sell when there is a period of poor performance and miss out on the subsequent gains if the fund recovers."

Invest regularly

"Investing on a regular basis can help give you a smoother ride when investing and therefore less cause for concern.

Drip-feeding regular amounts in on a monthly basis is a great discipline to get into for long-term investors, it means you don’t have to remember to invest as the money can be automatically added to your holdings each month."