Mistakes to avoid when markets are turbulent

 

These three common mistakes are easy to avoid. Making them could be costly. 

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Sharp downturns on global financial markets are always unsettling.

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Over recent days, largely in response to growing fears that the United States is heading into a recession, share markets fell heavily before rebounding.  

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Share markets may remain volatile over the short term. But a key lesson is that it never makes good investment sense to be swayed by the day-to-day movements of share markets into making knee-jerk investment decisions.

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Rash decisions made in response to short-term events will invariably have negative long-term consequences.

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What's most important is to have a long-term investment strategy and diversified asset allocation plan, and not to deviate from that plan, even when markets do fall sharply.

 

Three mistakes to avoid
 

1. Failing to have a plan

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Investing without a plan is an error that invites other errors, such as chasing performance, market-timing, or reacting to market “noise.” Such temptations multiply during downturns, as investors looking to protect their portfolios seek quick fixes.

 

2. Fixating on losses

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Market downturns are normal, and most investors will endure many of them. Unless you sell, the number of shares you own won’t fall during a downturn. In fact, the number will grow if you reinvest your funds’ income and capital gains distributions. And any market recovery should revive your portfolio too.

 

3. Overreacting or missing an opportunity

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In times of falling asset prices, some investors overreact by selling riskier assets and moving to government securities or cash equivalents. But it’s a mistake to sell risky assets amid market volatility in the belief that you’ll know when to move your money back to those assets.

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While past returns are not an indicator of future performance, they do give a fairly good indication of the differences in returns between different types of assets.

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Shares are renowned for being more volatile than other asset classes, however they have typically delivered the best returns over longer-term periods.

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Share markets invariably recover their lost ground over time. So, the best strategy is always to stay on your course, irrespective of sudden market jolts.

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What's most important is to have a long-term investment strategy and diversified asset allocation plan, and to not to deviate from that plan, even when markets do fall sharply.

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If you’re really not sure about what to do now, or your overall financial direction, you could consider consulting a financial adviser.