It is easy to see how individual investors can be confused and anxious recently because of the Euro-zone crisis – and many will be wondering what to do next.
In a buoyant market confidence runs high and most people feel they can take higher risks and expect higher than average returns. But when, like now, the markets are volatile, investors tend to take the other extreme position and stay in cash or bonds. But the greatest advice at times like these is to adhere to your investment strategy (as long as it is a sound one) even if it makes you feel uncomfortable.
But, in times of market turbulence this advice is rarely adhered to and we see investors making the same common mistakes time and time again. Here are the top three:
1. We tend to ‘follow the herd’ and seek safety in numbers. This type of investor behavior means we are easily affected by all media noise which blinds us against making rational investment decisions.
2. The pain we feel when we take a financial loss is twice as large as the joy we feel from a financial win. We are programmed so that a short term loss means more emotionally to us than the ability to appreciate the medium or long-term wins, which directly impacts our investing behavior.
3. We confuse price for value. If the markets are at a discount, shouldn’t that be a good time to be buying quality stocks?
Hence, if you recognize that we succumb to the above pitfalls - then you know we need to be smarter in order to catch the market edge – we need to look beyond the doom and gloom of market volatility.
When the going is good, most people are not averse to engaging in risk concentrated activities such as emerging markets or commodities. But it makes sense to have your portfolio founded on a well diversified investment strategy – no matter what is going on in the markets.
You can reduce the impact of market movements by diversifying your portfolio and by doing this you reduce your risk. There are a number of ways to diversify within your portfolio, for example you can diversify across the four different asset classes: shares, cash, property and bonds. You can diversify within the asset classes themselves, for example purchasing shares in companies that operate in different industries such as mining and banking retail etc. You can also diversify across countries which will reduce your exposure to a single country and currency. Managed funds are a good way to help provide you with an easy route to diversification.
To survive in volatile times (and even profit from them), it is important that your portfolio has a strong framework and you have the discipline to save and invest in both good and bad times.
We know it is tough to keep a balanced view of things around money in turbulent times and a financial guide with a compatible philosophy can help to keep you grounded, even when the markets are not.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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