Letter from the Editor: The biggest mistake new investors make in volatile markets

One of the hardest parts of investing isn’t picking the right fund or stock – it’s managing your own behaviour.

That’s especially true right now. Markets have been more volatile in recent weeks – a response to global events, worries about limited oil supplies, and the effect that will have on prices, jobs, and the world economy.

‘Volatility’ simply means stock prices are moving up and down more than usual. If you’re a new investor, the ‘downs’ in that cycle can feel particularly unnerving.

When things feel uncertain, it’s natural to want to do something: Check your portfolio. Move money. Sell. Buy.

As an investor, this is why it’s just as important to understand something about human psychology as it is, money.

When markets rise, people tend to feel confident and optimistic. That can lead to buying more – sometimes at high prices – because it feels safe and everyone else is doing the same.

When markets fall, the opposite happens. People feel fear and anxiety, which can lead to selling investments to “stop the losses” – even if those losses are only temporary.

This creates a common pattern:

Buy when prices are high, sell when prices are low. In other words, emotions can push investors to do the exact opposite of what tends to produce the most successful investing outcomes (selling when prices are high, and buying when they’re low).

So what should you do instead?

Keep it simple. If you’re nervous about which decisions to make and when, stick to investing in managed funds or ready-made portfolios where experts make decisions for you, or put your money in a simple tracker fund which mirrors the movements of the whole market rather than trying to pick a select few stocks.

Make sure your investments are well-diversified (spread out over different sectors, assets, and geographies) so that not all your eggs are in one basket.

Focus on the long term. Don’t stop investing. And remember why you started in the first place.

You don’t need to outsmart the market to be a successful investor. In fact, it can be counterproductive. Trying to ‘time’ your buying and selling to coincide with the top and the bottom of the market is so hard that even professionals only get it right around 50% of the time.

Remember that markets don’t move in straight lines, and some of the strongest days often come right after the weakest. If you sell at the wrong time, you risk missing those recoveries.

As a long-term investor, it’s not about perfectly timing when to get in and out – it’s about staying invested long enough to benefit from recoveries and for compound interest to work its magic.

Time in the market, not timing the market, is what tends to make the difference. So next time your emotions are calling you to do something, remember that your goals are long-term, and they are not always best served by knee-jerk reactions to short-term market volatility.