To win at investing - have an investment philosophy & more importantly STICK TO IT!
Markets are volatile, some “asset classes” are crashing while other asset classes are outperforming.
There’s war, the climate crisis, inflation, job uncertainty, monetary policy, supply chain shortages etc. etc. all impacting on market behaviours.
Although market movements are influenced by underlying economic reasons, in our opinion and experience, they are far more influenced by investor behaviour.
We have seen investors buying assets when the fundamentals just don’t stack up. As a result of so many people buying in, the price of the assets continue to rise, sometimes at a faster pace - despite the underlying investments not being worth this amount.
For less experienced investors panic creeps in. Some investors feel they are missing out on the next gravy train and rush to get in, paying less attention to actual value versus market price.
Then markets start to turn. Those who bought in to make a quick win, or those who invested cash that they can’t afford to lose (house deposit), or those who are just uncomfortable with how volatile their investments are, sell and a lot of the time sell at a loss.
Essentially, they have taken their hard-earned cash and made financial decisions that were not right for them. At this point when the underlying fundamentals are worth more than what the market will pay for them, the savvy investor buys.
BUY LOW, SELL HIGH
Scientific studies have shown that the average investor lags the actual market return by 1% (Ref: Maymin, Philip and Fisher, Gregg S., Past Performance is Indicative of Future Beliefs (April 11, 2011). Risk and Decision Analysis, Forthcoming, NYU Poly Research Paper)
Although this is an old study, human behaviour has not changed. In averaging at 1% a year less than market, it is important to note that this represents the average.
One could speculate that those who stick to their investment strategy at least perform in line with the market, whilst those who sell out underperform by crystallizing their losses and miss the bounce.
With an average yearly underperformance of -1% does this suggest that more investors sell out than not?
So how do those who succeed do it?
The way to winning with investing is to have a solid investment strategy at the outset and hold firm. This includes a potential exit strategy, e.g., price and stick to it, don’t let your emotions sway you.
Invest only what you do not require access to for at least 5-7 years – statistically you are more likely to experience a positive return over such a period, than not. This is assumption is based on historical analysis of past performance and it is important to note that past performance is no guide to future returns, you may get back less than you invest.
Understand what you are investing in, its likely volatility, potential downside loss and its liquidity. If you don’t, you should acknowledge to yourself that you may be making a speculative investment and be prepared to lose all of this investment.
If your investment philosophy was right at the time of the investment it should still be right no matter market movement, assuming of course you have invested in transparent, regulated investments.
Working with a financial adviser will assist you in devising an appropriate investment strategy bespoke for you and sticking to it. In a survey completed by Broker’s Ireland in 2021, 1000 participants were interviewed with the benefits of engaging a financial adviser. On average those who worked with a financial adviser had 53.9% more savings and investments than those who had not.