Don’t panic!

Markets have been volatile, mainly to the downside, for the past few months. Markets are always volatile — that is they are moving in different directions all of the time. But, perhaps unsurprisingly, it is downward movement rather than upward that causes the concern to investors.

A lot of investors spend a lot of time, probably too much, worrying about their investments. They often buy concentrated positions in a few shining stars and then hope.

What happens next is all too predictable. One position rises and they pat themselves on the back. Another one falls and they grumble and blame “the market” or some other external factor

What they never do is blame themselves. No matter how bad the pick turns out to be, any losses must be attributed to the actions of others and never the stock picker.

Then, a familiar pattern appears. Fearful of taking more losses, the investor begins to focus on the losers in the bunch. For a while, the winners offset the losers. Then the paper losses mount and the pressure is on.

Just when things are at their worst — the whole portfolio is negative for the year! — the investor decides to cut their losses. The dog gets sold.

Naturally, many of those supposed “loser” stocks soon spring back. The winner stocks of last quarter lose steam, too. The portfolio looks quite different only a few weeks later.

And on it goes, failing to sell a gainer while it’s high enough to warrant it, then failing to hold on to supposed losers until the loss is so bad it must be realised immediately.

The solution, the research shows, is to depersonalise the whole matter. Why pick stocks at all when you can own the whole market? What the numbers show us that “time in the market” trumps “timing the market” year in and year out. Rather than renting stocks for a short period of hoping for a pop, you own them for years.

Whilst it is almost impossible to forecast with accuracy what the stock market will do in the immediate future, it can be pretty predictable over the longer-term. Therefore, volatility can provide important buying opportunities; and on a broader note, it is best to simply feed money in over time in a measured way in order to take advantage of the beneficial long-term trend of stock markets.

Over those years, the dividends are generated at a rate of about 2% a year. That money is reinvested automatically. Likewise, earnings growth becomes a lot steadier over the long run, with all of those peaks and troughs smoothed out. This translates into steady appreciation across the whole market.

And, so you compound your money, year in, year out, just by buying and holding stocks. Add that to a portfolio of foreign stocks, bonds, commodities and real estate and you’ll likely do a bit better.

This is generally our advice — move a step further away from the investment decision. Identify your risk appetite, time horizon, and investment goals, then start to plan in a structured way.

Employ a manager to build and run a diversified portfolio, and simply monitor on a regular basis. They will provide you with a summary of any changes, and give reasons for the changes that have been made.

They will rebalance as necessary and help you to avoid the worst of the excessive, scary highs and the depressing lows, which can happen and will happen over the years.

‘Time in the market’ works because it forces you to ignore your emotions. We all love the idea of winner stocks and want to own them forever. But we equally hate the idea of losing money and will do anything to stop that pain.

The fact is you will experience both emotions — investing is not a straight line, it is not a bank account, but by having a disciplined portfolio keep us from overreacting and hurting the long-term positive return we all need to retire well.

The writer is Managing Partner, deVere Acuma