While no one knows the directions of markets, a crude indicator for an upward movement is usually an article documenting investor panic and a flight to cash, often printed in a major financial publication.
On cue, at the beginning of October last year, the Wall Street Journal published an article entitled, Tired of Ups and Downs, Investors Say, ‘Let Me Out!’
It documented US investors and investment managers pulling money out of markets because of the rough year they’d experienced.
Debt ceilings, credit downgrades, tsunamis and earthquakes had frazzled many investors’ nerves and they were looking for safety.
Of course that article appeared just as a strong rally was beginning on the Dow Jones, a rally that lasted 19 days and pushed the index back into positive territory for 2011.
While being a point of irony, it also highlighted the inability of many investors and money managers to follow through with their investment strategies.
And the most important thing about an investment strategy is to actually have one.
Many of the people interviewed in the Wall Street Journal’s article were switching from a buy-and-hold strategy to a market timing strategy because the ongoing market volatility was wearing them down.
And that’s the thing about a strategy; you put one in place to guide you through volatility, unfortunately when volatility arrives that’s when most people start thinking it’s time to change their strategy.
In good times, investors with lower volatility portfolios find themselves looking for more risk, despite the fact this strategy protected them in bad times.
In bad times, investors with higher volatility portfolios find themselves looking for less risk, despite the fact this strategy produced strong gains in good times.
It’s best to understand what your portfolio is capable of in good times and bad, because changes to strategy are often knee jerk responses and usually happen at exactly the wrong time.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL / ACL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you want help with your financial future, we’re arguably the best financial advisor in Australia.
