Time isn't timing
When doing nothing is best
Market volatility is inevitable, but how you respond is vital to investment success.
When did you last read a headline celebrating billions of pounds being added to UK pension pots after global stock markets jumped? Probably never.
Emotive words like “crash”, “tumble”, “slashed” and “turmoil” make for much better headlines. That’s why we always hear about the bad days for markets. And for investors that can be a big problem because emotions and money don’t mix.
We’re often told to remove emotion from investing, but that’s not really possible. We’re humans after all, and emotions are what motivate us to invest - our hopes for the future, the need for security, a desire to protect our family and so on.
The reality is that emotions can impact financial decisions far more than logic, analysis and numbers. The emotional biases built into the minds of investors can be very hard to overcome. But understanding them can help us make more informed and rational decisions that stay in tune with our long-term goals.
Why fear can hurt your portfolio
Loss aversion is one such emotional bias, and it can prove costly. People fear losing money far more than they value gaining it. Research has shown that the emotional impact of losing money is twice as powerful as the boost we get when we make a similar profit.
The risk is that fear of loss starts to drive your investment decisions. That could mean hanging onto a poor-performing investment for too long or, more likely, selling up at the first sign of trouble.
And that’s a challenge, because the only guarantee that comes with investing is that there will be tough times. It’s inevitable that stock markets will go through periods of uncertainty, perhaps due to some poor economic news or a geopolitical shock.
It happens more often than you might think. Over the last 20 years, global equities have suffered a fall of 5% or more in almost every calendar year. In 11 of those years, the drop has been more than 10%, and five have involved falls of 15% or more. The two worst years saw falls of more than 20%, as the Global Financial Crisis and the COVID-19 pandemic rocked markets.
In other words, there have been plenty of reasons for investors to run for the hills.
Source: FE Analytics, Parmenion
Why staying invested pays off
What those events have also shown is that sharp falls tend to be concentrated into short periods of time. Similarly, the biggest gains are often clustered together and follow quite quickly after the drops.
Consequently, investors who make a knee-jerk reaction to a fall are at risk of missing out on the recovery. That can have a big impact on long-term returns.
In contrast, those who sat on their hands and stayed invested have been rewarded for their patience. Global equities have enjoyed an annualised return of over 700% during those 20 years.
The $8.56 trillion sell-off: a case study in investor panic
We don’t need to look far back for another example. At the beginning of April, markets threw a full-blown tantrum following President Trump’s ‘Liberation Day’ tariffs announcement. Headlines screamed with news that $8.56 trillion was wiped from the value of global stock markets in a little over a week*. The US S&P 500 index suffered its worst ever two-day period.
Who could have blamed investors who hit the sell button? Yet less than a month later, after US stocks had staged their longest winning streak in two decades, Wall Street had clawed back all the losses incurred in the sell-off. It was another lesson in why investors should avoid panicking when things look bad.
No-one knows what will trigger the next bout of market volatility. The one thing we can be sure of is that it’s coming.
When it does, what’s vital is to remind yourself why you invested in the first place. Don’t shift your focus from 30 years to 30 minutes, or as long as it takes to make a decision based on an emotional response to what’s going on around you.
Your adviser, your anchor
That’s where a financial adviser can potentially add real value, as a sounding board, to keep you focused on your long-term goals and to help you avoid making impulsive decisions based on short-term market movements.
Investing isn’t always an easy emotional journey, but tuning out the noise can go a long way to keeping you on track.
*The sell-off in financial assets wiped $8.56 trillion from the value of the global stock market between close on 2 April, just before the Liberation Day speech happened, and the end of day on 8 April, as measured by the FTSE All-World index AJ Bell 29/4/2025.
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This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.
