The volatile state of the stock market can make buying UK shares a daunting task. After all, there’s nothing more frustrating than seeing the price of a stock drop after completing a purchase. And fearful investors often make rash decisions to try and minimise losses that can backfire spectacularly.
So how can I avoid such mistakes if I were looking to invest a £1,000 lump sum today? Let’s take a closer look.
Loss aversion is a trap
In the short term, the stock market can be pretty chaotic. Shares seemingly move in random directions. And when investor nerves are on the rise, sudden downward shifts can emerge out of nowhere.
For novice investors, this is the perfect breeding ground for panic and despair. And after watching a stock drop by 5% or even 10% in a single day, there’s a strong urge to hit the ‘sell’ button as quickly as possible to minimise any potential losses.
Loss aversion is a powerful emotional response that’s pretty difficult to ignore. I was certainly guilty of panic selling near the start of my investment journey. And when things seemingly fall apart, it can easily look like a smart move. But all too often, time would prove selling early to be a grave error.
Volatility is a natural part of the investing process. Investors, especially those pursuing growth stocks, must get used to ignoring short-term fluctuations and focusing on the underlying business.
In the long run, it’s the latter that drives stock prices. And with over a decade of experience, I now know that volatility, while frustrating, is the perfect time to find fantastic opportunities.
Don’t be an ostrich
Volatility isn’t a reason to panic. But that doesn’t mean I can simply stick my head in the sand. If investors are busy selling a stock, I need to figure out why. It could just be unjustified panic-seling. But panic is usually triggered by uncertainty surrounding a company’s financials or operations.
The question is whether this problem is a short-term issue or whether the firm has become fundamentally compromised. If it’s the latter, then my investment thesis may have become invalidated, and action may be necessary.
However, suppose everyone is getting their knickers in a twist for an issue that can easily be resolved within a few months, or even quarters? In that case, an opportunity may have just emerged for me to increase my investment at an even better price.
Investing £1,000 in 2023
With all that said, the best way to invest a lump sum today is the same way I would invest, regardless of volatility. In my opinion, investors should spend time finding the best British businesses on the London Stock Exchange and focus on the long run.
The research process can take time. And even high-quality stocks can still fall prey to rapid price fluctuations. But for those who take a disciplined approach, even a volatile stock market can help build tremendous long-term wealth.