No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.
As with any walk of life, in investing we devote a lot of time to working out what success looks like and how to achieve it.
We study the methods of great investors past and present, looking for tips and techniques we can apply to our own situations.
Yet just as important to the overall result is avoiding common pitfalls. In my thirty-odd years working in this industry I’ve seen some mistakes made time and time again. This issue of the Investment Times is dedicated to identifying some of the most common – and working out how to avoid them.
Why news flow can be dangerous to long-term wealth
I’ll start with one I think is especially relevant in today’s news-driven climate.
Investors today are constantly bombarded by news flow about ‘important’ events. Interest rate decisions, economic growth figures, elections, referendums, the list goes on.
I recently spoke to fund manager Nick Train, who told me that when he stopped considering what effect economic and political news would have on share prices, it was like a great weight had been lifted from his shoulders.
Technology has made this worse. The internet has encouraged a proliferation of blogs, articles and content, all fed by a focus on future events. Combined with an ability to trade at the touch of a button, it now seems investors are constantly looking over their shoulder for the next big problem to hit markets, and fretting over how they should react.
This can be dangerous to long-term wealth. It can put people off investing entirely, or encourage them to make snap decisions, sometimes with disastrous consequences.
For a recent example you only need to consider the Brexit vote, which caused huge concern among investors. But even those who correctly predicted the vote to leave largely failed to forecast the market’s reaction. Many might have sold on news of the result and missed out on the ensuing market rally.
This illustrates perfectly why we think it’s best to ignore the short-term noise and focus on the long term.
The very nature of these events tends to stir emotions, and emotions usually make for poor investment decisions. I recently spoke to fund manager Nick Train, who told me that when he stopped considering what effect economic and political news would have on share prices, it was like a great weight had been lifted from his shoulders.
It gave him the time and freedom to do what he does best – finding good quality stocks and holding on to them for the long term.
While my suggestion is neither fashionable nor particularly sexy, I believe patience is a virtue. I’m sure most investors would do much better if they focused less on the next set of growth figures, election or whatever else is worrying them, and concentrate instead on their long-term plan.
That’s assuming they have a plan – those who don’t should read our article on that subject!
Reasons to sell?
Investors have had plenty to worry about since the UK market bottomed in 2009, but this chart helps illustrate why we think it's best to focus on the long term.
Past performance is not a guide to future returns. Source: Lipper IM, 31/10/07 – 31/10/17
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