As we end another rollercoaster week and indeed a year to forget, FTSE 100 investors, as well as analysts, are wondering whether we are in a bear market. The UK has a healthy economy. However, the Brexit discourse that has dominated our lives for over two years has left that economy, including the fate of the pound, in uncertainty.
It would be too optimistic to expect the FTSE 100 to recover fully and fast when we still do not know what is in store for the country after the expected Brexit deal vote in mid-January. Amid all the noise, it is not easy to pinpoint exactly where in the economic cycle we are.
Crowd Psychology
Today might be an appropriate time to remind ourselves that choppiness and downturns have always been a reality of financial markets. Most of our readers would have heard of several of the famous historical bubbles and stock market crashes.
These past financial crises which have significantly impacted investors at the time include the Dutch Tulip Mania of the 17th century, the South Sea Bubble of the 18th century, the British Railway Mania of the 19th century, the Florida Real Estate Bubble of the 1920s, the Wall Street Crash of 1929 – leading to the Great Depression, Black Monday in October 1987, the collapse of Barings Bank in 1995, the dotcom Bubble in the late 1990s, and finally the financial crisis and the bear market between 2007 and 2009.
I enjoy reading about the history of the financial markets. The story of each bull or bear market may initially look different, but dig deeper and it isn’t. After all, human psychology never changes: fear and greed are the two emotions that drive investors to the extreme. In other words, crowd psychology always impacts financial markets.
Market timing: a costly attempt?
The common denominator in all of these market downturns has been that it is almost impossible to know when exactly they will start or end. It is tempting to think we are somewhat better than the investor next door, especially when it comes to predicting the market turns. But it is rather difficult to keep a cool head when the value of our portfolio is falling and the news is full of doom and gloom.
In other words, individual investors are usually wrong when attempting to time the markets. If they act upon their emotions and sell at the height of the panic, then those investors potentially miss out on the gains when the markets recover – and yes, markets do recover.
We are long-term investors
Let’s also remind ourselves why we invest in equities. Most of us aim to build a safe nest egg especially for retirement as well as for emergencies that life may throw at us. Financial planners, investment professionals, and seasoned investors all agree that patience and keeping a steady hand is crucial in building an investment portfolio made up of fundamentally solid shares. At The Motley Fool we also believe in holding shares for the long term and we hope you do too.
London has always sat at the centre of international financial markets and attracted robust companies to list there. Eventually, the dust will settle in the equity markets, and strong shares will once again shine. Until then, investors need to stay focused and disciplined.
