Being a Confident Investor

Being a Confident Investor

In recent years, with the global economy going through a relatively chaotic phase, we have seen plenty of screaming headlines like “$40 billion wiped off Australian share market in one day!” “Markets brace as crisis in Europe flares up again.” These headlines might be great for selling newspapers, but they are not much use to us as investors and can seriously mislead us.

In the face of all these apparent disasters, it’s very easy to panic and make snap decisions. That’s only natural—it’s also one of the worst things you can do.

Don’t panic

Douglas Adams put it very neatly on the cover of the Hitchhikers’ Guide to the Galaxy, which read ‘Don’t Panic!’. When we see share prices plummeting due to the latest apparent economic catastrophe, our immediate reaction is likely to be “I must do something before it’s too late!”

So what do we typically do? We withdraw our investments and reinvest the money in a term deposit. Then, when prices pick up again, we cash in the term deposit and buy shares again. What are we really doing when we do this? Often the result is that we have repurchased our shares at a higher price than we sold them — exactly the opposite of a desirable outcome.

But is it different this time?

After every major fall, the Australian share market has bounced back in a big way — over the last 100 years the overall trend has been consistently upwards. Of course there have been negative years but these are easily outnumbered by years with positive returns.

Any attempt to pick short-term stock market high and low points for buying and selling inevitably leads to incorrect decisions by a majority of people. Even the most expert investors don’t have a crystal ball telling them what the market’s going to do in the short term, so what chance do we have of getting it right?

Slow and steady wins the race

For those with capital to invest, a simple a comparatively low risk way to invest is to ignore the rises and falls of the market and keep investing at a steady pace. You might buy at a higher price one month, a lower price the next. Over time it all averages out, but you’ve substantially reduced the risk of making a big but avoidable mistake.

Assuming we have very well diversified investments, good advice might be to just stop tinkering with them altogether. A sensible approach can be to stop trying to squeeze out the last percentage point of potential return and accept ‘market’ returns which can be far easier to obtain and very satisfactory.

To make this approach work though, you need a long-term plan.