The table above shows how investors who sold a FTSE 100 index tracker or exchange traded fund (ETF) on the day of the Chinese crash and didn’t promptly re-enter the market would have missed out on gains of around 6.7% over the rest of 2015. Any investor who sold on this date and didn’t reinvest until well into the 2016/7 bull-run missed out on significant gains.
Panic selling is largely driven by a psychological trait called loss aversion. Studies have found that for a large number of people, the psychological impact of potential losses is nearly twice as powerful as the impact of potential gains of the same size.
To make matters worse, there are always economic and financial events on the horizon that can scare investors into the thinking markets are likely to fall sometime soon. Be it the return of a European banking crisis, a slowdown in the Chinese economy, or war on the Korean peninsula… the list could go on and on.
Manage your wealth wisely and take a long-term view
Investors who are in the relatively early stages of accumulating a pot of money for an investment goal should not only be investing in the market on a regular basis, but using dips as a buying opportunity. This has the effect of pound-cost averaging, which you can read more about here.
IG has a range of five expertly-managed Smart Portfolios that you can invest in. In the Aggressive Portfolio – the highest risk portfolio – the intent to act upon such investment opportunities in equities is highlighted by holdings of ultrashort bonds. These are considered similar to cash and also counteract the long maturity in the UK gilts and Index-Linked bonds that are held in this portfolio.
For investors who are close to meeting their investment goal or fast approaching their investment time horizon, unexpected events that could potentially have a negative effect on equity values should be factored into asset allocation. Holding asset classes with a low correlation to equities such as bonds and precious metals should provide a cushion to such falls. The Balanced Portfolio currently contains 48% Equities, 48% Fixed Income and 4% Gold.
All types of investors should remember to remain focused on their specific investment goals; such as saving towards buying a first house, a child’s education or generating funds for retirement. The path to doing so can be an unsteady one, but investors who can confidently navigate fluctuations in equity prices and take advantage of corrections to the market are highly likely to succeed and meet their goals over the long term.