Charles Stanley Wealth Managers looks at how to manage market volatility by understanding your own emotions

Sara Anscombe, Senior Investment Manager, Charles Stanley Wealth Managers explains that investments are volatile. This is one of the first lessons a novice investor should learn in the markets.

There is always a degree of uncertainty about the outcome of global markets – and any investor needs to both understand this and decide how they feel about this “risk”. Volatility shouldn’t be a barrier to investing, but markets can go down as well as up for periods of time and it’s important to understand the psychology behind decision making at these times. The best decisions made here are usually logical and not emotional.

Investors need to recognize and understand their own feelings and reactions to market movements, whether negative or positive. This indicates how they will react to a rapidly changing situation.

As professionals, this focus on controlling the emotional and trusting the logical parts of our brains is something we all already do in our day-to-day work activities. It becomes second nature.

In a bear market, “selling” can provide principal protection, but if you’re not using the proceeds from the sale, deciding when to buy back into the market can be a major challenge. Stock markets usually make headlines for negative reasons – and it can often be the best time to invest. As Warren Buffet, one of the world’s most successful investors, succinctly puts it, “Be fearful when others are greedy and greedy when others are fearful.” However, this often goes against our natural instincts.

If you are selling holdings during a period of bad news, you may be selling at the low of the market – the lowest price before it started to rise. Markets react immediately to such news – by the time you hear it, the market will have already priced it into valuations.

The key is to know your individual risk appetite. This is also a nuanced position – your risk appetite may rise or fall as your priorities change over time. It is important to remember that unless you need the funds immediately, any loss is only on paper. Markets often react the opposite of what you expect. Therefore, we recommend investing with long-term time horizons of five years or more, as this can help weather periods of market volatility. This is a reasonable time frame to use as a framework for your decision making.

“Buy low, sell high” is a pretty simple mantra, but you’re unlikely to sell at the top of the market because you have to hear the first bad news to react to it. Then it’s hard to time when you re-enter the market. Usually you have to buy when the news is bad, and only in hindsight do you know it was the bottom of the market.

The subject of investor psychology is clearly more complex than it can be explained in a single article. As investment professionals, being logical in our decision making rather than emotional is something we do day to day.

If you would like to discuss any of the relevant topics or find out how Charles Stanley can manage an investment portfolio on your behalf, please contact a member of the Oxford team by emailing [email protected] or by calling 01865 987 485

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The value of investments, and any income from them, can go down as well as up. Investors may get back less than their initial investment. Charles Stanley & Co. Limited is authorized and regulated by the Financial Conduct Authority.

Dolores W. Simon