Last week everything was sunny with the FTSE 100; today it’s distinctly overcast. Everyone’s taken fright due to problems in Italy at the weekend – slight issue with having no government. Many are murmuring that it’s the end of the euro, while others see it as a short-term blip. Whichever way it goes, the value of our Isas and pension is sinking. So what should investors do?
Probably nothing, is my answer. It’s very easy to let emotions cloud your thinking when it comes to finances. The minute you see that you’re losing money, your instinct is to sell out and secure whatever is left. Likewise, when you see everyone else minting it, the knee-jerk reaction is to pile in and get a piece (see bitcoin and cryptocurrencies which are the fashion of the moment).
This is a terrible strategy, however. You end up selling when everyone else wants to get out, so you won’t get a very good price. Similarly, when investments are hot, they tend to be expensive and you end up overpaying. This is completely the opposite of buying low and selling high which is a general rule of thumb for making money.
I'd like to share an example of my own ‘rashness’ with caution. Last year, on 27 March to be precise, I decided the market was too high and a crash could only be imminent. I decided to sell some of my FP Crux European Special Situations fund (bit of a mouthful that one, but essentially it invests in the shares of European-based companies). It had done exceptionally well so I sliced £3,000 off the top and shoved it in cash. And promptly forgot about it.
Of course, the market did not crash – although there were a few dips which is normal and from which it swiftly bounced back. My £3,000 lingered in some measly account earning less than 1% while the Crux fund has earned 12% (although that may be less by the end of today). If I’d kept the money where it was, I’d have earned £360 on it, not £30.
All of which goes to show that you really can’t judge the market and your best bet is just to stay in. I’m a great fan of regular saving plans where you invest a small, fixed amount every month. In this way, because your spend is fixed, you end up buying more investment when it is cheaper and less when it is expensive: a winning tactic with zero effort on your part. And you must do it over the long term (preferably 10 years or more) to have a chance of recovering from any downturns along the way.
So I won’t be pulling my money out of Europe – just yet. But let’s hope those Italians make some decisions about ruling themselves very soon.
See our SMM beginner's guide to investing here.