Investor Behaviour And Opportunities

19.02.16

Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

Most times in life, when we are looking to buy something we view falling prices as a positive factor. We often wait for the sales to get better value for money. When it comes to investments, however, many people behave very differently.

Most times in life, when we are looking to buy something we view falling prices as a positive factor. If we want to buy a new TV, furniture etc, we often wait for the sales to get better value for money. Lower prices can encourage us to buy. If, for example, the prices of cars made by your favourite manufacturer have fallen, you may take the opportunity to buy a new car now.

It is similar with property. Even though when we buy property we hope it will rise in value over the period we own it, many people will take advantage of falling property prices to make the purchase then.

When it comes to equities, however, many people behave very differently. Falling prices make them fearful and they refrain from buying shares at that time – they may even sell the ones they have. Inversely, they see rising prices as a good thing and buy shares when prices are high.

John Templeton quoted the famous American investment specialist Benjamin Graham when he said “Buy when most people… including experts… are pessimistic, and sell when they are actively optimistic”. That can be easier said than done, though, when we are bombarded with media reports nowadays and it is our own hard earned wealth we are considering.

Emotions play a large part in investor behaviour. As the prices of an asset rises, investors are attracted by the returns they have seen so far and buy this asset. They do not mind paying more than they would have done a few weeks before because they still expect to make a profit. However, if you have ever seen the “cycle of market emotions” graphic, the point of “euphoria”, when prices are highest, is also the “point of maximum investment risk” because that is when it is most likely that prices will start to come down. So many investors find they have bought when prices were at their highest.

Likewise, as markets fall investors get fearful about losing their money. Many existing investors sell their shares, causing further falls. People with money to invest sit on the side lines, waiting until they feel confident that prices are back on an upward path. However, when markets are lowest, the point of “despondency” is also the “point of maximum financial opportunity”.

Although stockmarket volatility can be uncomfortable, it can bring value back to the markets and create opportunities. If you have capital to invest, share prices falling can be a good time to buy. You can potentially buy more shares with your money; shares that will rise in price once the downturn ends.

If you are still concerned the market may fall further – even though it could instead rise – you could apply the principle of 'pound cost averaging' (or euro or dollar cost averaging, depending on your base currency), where spread out entering the market over time.

The principle of pound cost averaging notes that if you invest, say, a third of your money on one date, a third two months later and the balance two months after that, the average of your investment will provide comfort that since you have not invested all at once, you are not unduly exposed to the risk of the market falling the day afterwards and a better opportunity having arisen. Only one of the three dates will have provided the best prices returns, but it means you can be 'in' the market from day one in case the market rises from then.

As history has shown us, markets always recover eventually. If you look at the last five decades, declines have been followed by upturns which on average have been longer lasting and with gains which were larger than the losses preceding them.

What we cannot know in a downturn is when markets will hit the bottom. If you keep waiting for that to happen you will probably miss the upswing, which is often when price increases are sharpest. Do not risk waiting too long. Make your investment but be prepared for further short-term volatility and, importantly, to hold your investment for the longer-term.

We do not generally advocate ‘timing the markets’ – it is ‘time in the market’ that counts – however this does not mean that those with capital to invest should ignore the opportunities presented by falling markets.

While volatility can be worrying, if you are invested for the long-term your portfolio should ride out temporary market volatility. A chart from Blackrock1 shows how a £10,000 hypothetical investment in the FTSE All-Share Index would have grown to £71,602 in the 25 years 1989–2014. This was in spite of major events like September 11th, the subprime crisis, Lehman Brothers collapse and European sovereign debt crisis.

That said, as always, your investment strategy and choices should be dictated by your specific personal circumstances and objectives.

The starting point is to obtain a clear and objective assessment of your attitude to risk, and then make sure your portfolio matches your attitude to risk. Your time horizon also plays a very big part in determining which investment assets you should own.

Diversification is critical in determining the success of your portfolio – it decreases overall risk and enhances the potential for long-term returns. You need a well spread portfolio of investments, both across asset classes and geography, market sectors etc. Ensure you are not over-exposed to any one asset type, country, sector or stock.

Investing for the long-term does not mean investing and forgetting. It is critical to review your portfolio on a regular basis and adjust the strategy accordingly. This helps control risk and can have a positive effect on performance. As asset values rise and fall your portfolio can shift away from the one designed to match your risk profile and objectives and needs to be rebalanced. Your circumstances may also have changed.

Last but not least, build up a good relationship with your financial adviser, so that they understand your needs and concerns and will guide you through market turbulence as needed.

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1 From Blackrock’s brochure “Weathering Uncertain Markets – Learning from the past, positioning for the future”

These views are put forward for consideration purposes only as the suitability of any investment is dependent on the investment objectives, time horizon and attitude to risk of the investor. All advice received from Blevins Franks is personalised and provided in writing. This article, however, should not be construed as providing any personalised taxation and / or investment advice.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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