LIVING WITH MARKET UNCERTAINTY

Markets will be markets

The investment market has the ability to thrill and terrify investors in about equal measure. The concerns over Europe and the lack of visible recovery in the UK is amplified through the media and does nothing to steady nerves.

However, it is this very uncertainty that ultimately rewards investors.

In essence, the investment market is the sum of all participating investors. It is the best estimate of the value of each company. New information influences these values and thus the prices change. With uncertainty comes volatility.

To place in context, the recent market fall in the UK Equity Market has occurred ten times since 1955. Whilst we feel we are facing Armageddon, in fact, we have been here before. Markets do fall but they do rise.

What can we do as investors in these trying times?

The ultimate investment professional and one of America’s most respected investment practitioners, Charles D. Ellis, said:

Don’t trust your emotions. When you feel euphoric you’re probably in for a bruising. When you feel down, remember that its darkest just before dawn and take no action. Activity in investing is almost always in surplus.

Follow some simple rules

  1. Do not panic
    The greatest wealth destroying behaviour is to rush and exit the market. Evidence shows that investors, both private and institutional, are very unskilled at market timing. We forget past curses and believe that the current problem is the worst ever. It is not.
  2. Have faith in your investment portfolio
    Your equity exposure is well diversified around the globe and with both growth and defensive assets. Direct exposure to the debt of peripheral European economies is largely avoided or insignificant.
  3. A broad and longer term review
    The global economy actually grew by around 4% in 2011, according to the IMF. The US and German economies grew in the first quarter of 2012. Emerging markets continue to grow. UK and US companies hold significant amounts in cash, the highest level since 1955, according to The Economist. This corporate cash hoarding is part of the problem today, but part of the solution tomorrow.
  4. The action is in action
    Sit tight. Your portfolio is designed for good and bad times.

As John Bogle, one of the wisest and most respected investors in the world once said:

No matter what happens, stick to your program. I’ve said “Stay the course” a thousand times, and meant it every time. It is the most important single piece of investment wisdom I can give you.