Well we are living in interesting and trying times. We have seen falling markets, companies collapsing, volatile oil prices and government life lines being given to keep major institutions afloat. These must be the most volatile and uncertain markets seen for many years. This is, of course, the time when our clients’ natural instincts and behaviours need to be managed so they do not make those irrational decisions often experienced in times like this.
We do not have any control over what is happening in the markets and what will happen in the future, in fact nobody does but there are some lessons we can learn from history which assist us in managing the behaviours of our clients, resulting in the retention of their longer term wealth.
Dalbar Inc research shows us that reacting to market volatility and uncertainty is a sure way to erode your wealth. During the 20 year period to 2006, the annualised returns achieved by an investor in the S & P 500 was 11.8% BUT… the return experienced by the average investor in the same market was only 4.3%, a difference of nearly 7%. As we all know, this happens because investors react emotionally to the fluctuations in the market and the noise surrounding it which results in a buy high, sell low strategy being adopted without intention. Putting this into perspective, if we as trusted advisers were able to stop clients reacting to this market noise, the average investor would have benefited from a staggering increase of $1.62 million in the value of their investment.
In 1974 we experienced the 4th worst 12 month fall in the FTSE all share history -55% followed by the largest 12 month rise in all share history, +136%. This clearly goes to show that you have got to be in it to win it. These figures are a perfect example of when investors are most vulnerable and when they need to hear the words “Don’t do it”. Our advice is to stay true to the longer term strategy originally set and sit tight. Time is a great healer!