It's the best way to keep your focus when markets are volatile...
When markets are all over the place as they have been of late, the seismic shifts can be unnerving to say the least for the private investor. You can watch your shrewdly invested savings halve or double in relatively short order.
Naturally, this can cause euphoria or consternation. The situation is exacerbated by noise. Today, there's more noise than ever before -- and it's easier than ever to access.
Turbulent markets bring the hindsight commentators out in force. The chartists "knew" it was going up / down -- and it's going to go further yet. Learned economists and City traders talk about global concerns due to increasing (or maybe decreasing…) oil and commodity or house prices as reasons to be worried / happy / bullish / bearish by the minute. Meanwhile, you may be hitting "refresh" on your portfolio to find that you're losing or making a fortune every day.
What to do?
What's a private investor to do? Average down on the dips? Run a stop-loss? Sell into strength? Pyramid up? Bury your head in the sand? As the psychobabble advice says: "When you find yourself ruminating, yell 'STOP'!"
The best policy is to listen to company-specific news -- and only that, when markets are in decline. When they're rapidly rising, listen to the news and look at valuations.
Let's suppose you carefully select a company's shares having taken into account all the factors you possibly can. Now let's suppose it then moves sharply in one direction or another…
Moving on up
If the share moves up quickly -- whether or not this is part of a wider bull market -- it may be time to sell. In other words, even if you simply got lucky by buying your selection just as the bears became bulls then your perception of underlying value may have been vindicated coincidentally by overall sentiment -- but the value still may have been outed.
If the company's shares have moved up on company-specific news and the inherent value you spotted early is now accepted more widely; great. Whether to sell or not in either case will depend on your views of real value
On the other hand, if the opposite happens and the price tanks, this is a very different situation. When markets are seeing the kind of correction we've seen so far in 2010, it can be a scary time.
But unless there is specific news relating to the companies you've selected; why worry? The market's malaise is beyond both your control and your capabilities to predict with any kind of accuracy. But what you can do with a reasonable degree of accuracy is to come up with your perception of value for a company. So concentrate only on that and on specific news relating to the company in question. Then a non-news related fall may well be an opportunity to invest more money if you're feeling confident.
If you liked a share in December at a quid based on your analysis, but the market has now taken it to 80p and nothing has changed but sentiment and market noise, either take courage and buy more as they're even better value -- or relax, be patient and take the long term view.
Of course, you may top up only to see it then go to 70p, but if your initial analysis is sound and it's a general market fall that's causing the decline, either top up again or ignore the market noise and do nothing. It's unlikely you'll hit the absolute bottom in any case.
If, however, there's real news via an official company announcement or from other general news relating to a company's markets etc -- then take that into account in your decision-making. Personally, I've found ignoring general market direction to be a great strength in helping me to remain calm when the inevitable market dives occur -- and to make my biggest gains by buying on weakness.
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