With the manner of our departure from the EU still up in the air, it’s looking increasingly likely that the jitteriness of markets over the last couple of months will continue into next year.
Should this be the case, it’s more important than ever to be mindful of ways in which you might sabotage your own progress.
Befitting the forthcoming festive season, here are three absolute crackers that even more experienced market participants are susceptible to.
1. Selling for no reason As humans, we’re programmed to feel losses more acutely than gains. This is made all the worse by the fact that we’re also inclined to follow our peers in times of trouble. That may have been useful in saving us from sabre-toothed tigers back in the day, but this behavioural quirk is problematic when it comes to rationality in the markets.
As a Foolish investor, it’s vital that you fight against these inclinations. Unless the investment case of the business you part own has dramatically changed, regardless of whether it’s due to internal issues or external political events, it’s more than likely better to hang on. If it means stop checking our portfolios so often, so be it.
2. Stop investing completely Even if you manage to resist the temptation of selling stocks simply because everyone else is, you may be inclined to stop investing for while, at least until this political mess is sorted out.
Taking a cautious view may make you feel better, but it’s unlikely to do your wealth any good in the long term. Moreover, once Brexit is finally agreed (if it happens at all), it’s inevitable that something else will come along for the markets to ruminate on.
If you’re not intending to retire within the next few years, there’s simply no reason not to continue investing during periods of nervousness, such as the one we’re currently in. As Warren Buffett advises, we need to “be greedy when others are fearful.“
Is that easy to do in practice? Of course not. In an ideal world, we’d exit the market at its peak only to return at the low. In reality, this is incredibly difficult — some would say impossible — to do.
It’s for this reason that investing regularly in the equities, or ‘pound cost averaging’, makes so much sense. Buying little and often will go some way to smoothing out our stock market returns. Your money will buy you less when shares are expensive and more when they are cheap.
3. Failing to diversify Let’s say you’ve managed to avoid selling indiscriminately and are still committed to buying even when times are tough. So far, so good.
However, if markets do throw up bargains in 2019, there’s a tendency to forget another of the key tenets of successful investing: being diversified.
Holding a portfolio with a range of assets (shares, bonds, property, cash, perhaps a bit of gold etc) is something we thoroughly endorse at the Fool. If this means missing out on spectacular gains if only we’d put all our money in companies X, Y and Z, so be it. Unless you’re either incredibly skilled or lucky, being overly concentrated in only a small number of businesses can be a recipe for a disaster, particularly if these all operate in the same sector.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.