Increase Your Wealth By Doing Nothing
Doing nothing with your investments may be your most successful strategy for creating wealth.
With equity markets fluctuating so much over the past weeks as economic new flows from the US and Eurozone alter between good and bad (or perhaps bad and not so bad) it is easy to make hasty investment decisions that may later be regreted. I have spoken before about properly understanding risk and, as long as your circumtances haven’t changed significantly, a long term investment strategy should remain appropriate regardless of the short term nature of the stock markets in which you are invested.
Separating emotive decisions from calculated ones can be difficult at the best of times but when our wealth is on the line it becomes harder still. Seeing the value of capital wealth fall can easily lead investors to take decisive action to stop the rot but this “action bias”* is likely to prove more costly in the long run.
Action bias is the propensity we have to do something rather than nothing during times of crisis and it leads us to sell assets at the bottom of a market and buy at the top rather than the other way around. This is because we fear regret more than we fear loss. When markets are falling we fear the regret of losing further wealth more than if we sold any investments and crystallised a loss. In other words the fear of throwing good money after bad.
However, stock market analysis shows that over the long term equity markets do bounce back and provide long term value above all other asset classes, especially cash. Yes, there are decade periods when cash would have been a better place to invest than shares; 1999 to 2009 for example but these tend to be exceptional periods. By sitting tight during periods of market falls such as 1999, 2007 and 2011 investors are in position to see their wealth recover when the markets bounce and see the value of their wealth increase during periods of extended growth; 1987 to 1999 and 2003 to 2007 for example.
As a demonstration of the value of buying and holding. If you invested £100,000 into a FTSE100 tracker that fully replicated the returns, on the day the index launched (13th April 1984) until today it would now be worth £356,490, an annualised return of 13.2% pa . If you had panicked and sold at the bottom of each crash and delayed your re-investment your total return would be a lot smaller.
So, as I have mentioned a number of times before, if your investment objective is for long term growth do not panic and sell at the first sign of market volatility. Sit tight and remind yourself that markets go up as well as down. If you have the spare capital, consider taking advantage of a buying opportunity by investing more.
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* Reacting to uncertain markets – the “action bias”. Greg Davies, Head of Behavioural Finance at Barlcays Wealth.
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