Why inaction is a crucial part of successful investing
When you think about investing, it’s probably the actions you take that come to mind. That could be researching a fund or actively investing in a company by purchasing shares. However, the steps you don’t take are just as important for your portfolio to be successful.
That may sound strange, but not acting on impulses or short-term market movement is a crucial part of investing. And it can be more difficult than you think.
Reacting to market movements could harm your long-term returns
Investing should be logical. Yet, emotions and bias play a huge role in how investors feel and act towards their portfolios.
Think about when you read a headline that states the economy is on track for recession, or markets are plummeting. It’s natural to worry about what that means for your investments, and it can lead you to feel that you need to respond in some way by making changes to your portfolio.
Yet, long-term trends show that creating an investment portfolio that suits your long-term goals and then sticking with it often makes sense for the average investor. So, recognising when not to act is essential when you’re investing for long-term growth.
Research from Schroders demonstrates how emotional investing could harm outcomes.
If you invested £1,000 in the FTSE 250 at the start of 1986 for 35 years, you’d have received returns of 11.4% a year on average.
However, if you responded to news or other information and disinvested, returns could be lower. Investors that missed out on just the 10 best days of the FTSE 250 during that period would have annual returns of 9.5%. Miss out on the best 30 days over the 35 years and returns fall to 7%.
During those 35 years, there were periods of volatility. Investors that held their nerve and didn’t act may have benefited in the long run.
That’s why when it comes to investing, deciding not to act can be a positive action in itself.
4 useful ways you can curb impulsive actions when investing
1. Take your time when making a decision
One of the simplest ways to prevent action that could harm your long-term wealth is to take your time.
Sensationalist headlines can make it seem like you need to be quick to get the most out of investments. However, making snap decisions is more likely to lead to outcomes that aren’t right for you because you haven’t had time to think through the consequences.
Don’t feel pressured to make speedy decisions when it comes to investing – give yourself the time to weigh up the pros and cons.
2. Focus on the long-term results
Everyone would love to choose an investment that delivers an immediate return, but you need to take a long-term approach to investing.
Historically, markets have delivered real terms growth over long time frames. So, next time you read about markets falling or experiencing volatility, remember to focus on the bigger picture. The value of your investments could fall in the short term, yet history suggests if you hold tight, markets bounce back.
Of course, investment returns cannot be guaranteed and it’s important that your portfolio reflects your risk profile.
3. Try to ignore the noise
One of the reasons investors make impulsive decisions is that there’s often a lot of noise about what you should be doing. Whether you read the newspaper that informs you of an impending market crash or speak to a colleague about an investment opportunity you “must” get involved in, it can be difficult not to act. Try to tune out this noise.
Having confidence in your long-term investment strategy can make it easier. If you know your portfolio reflects your aspirations and circumstances, dismissing calls to action is less challenging.
4. Speak to us
As financial planners, we can help you manage your investment and wider financial plan.
We’ll take the time to understand what you want to achieve, so your investment portfolio and strategy are built with this in mind. The peace of mind that comes from working with a professional could mean you feel more comfortable taking an inactive approach to investing for the long term.
If you’re worried you should be doing something, we’re also here to answer questions and offer guidance. Simply having someone that has your best interest in mind to talk to could prevent hasty decisions that you may regret later.
Please contact us to arrange a meeting.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.