Reading as much as you can on how to respond during periods of market euphoria and outright panic counts for nothing if what you learn can’t be recalled at the time they actually happen. What we need is a simple phrase to remember when we’re at risk of succumbing to the deadly duo of fear and greed. My suggestion: ‘This too shall pass‘. I’d go so far as to say that these four simple words could decide your financial fate.
The origins of the phrase have been traced to the works of Persian Sufi poets. They told of a king who asked for a ring to be produced that would make him happy when he felt sad. His wise men returned with a ring inscribed with these words, thus allowing the king to remember that everything is always temporary. The only snag, of course, it that his new prized possession also brought him down to earth when he felt elated.
Regardless of where you might have heard the phrase before, it’s hard to question its utility to our lives — from appreciating that our loved ones won’t be around forever (and making that call you always promised to make) to the understanding that a sudden job loss doesn’t condemn someone to a lifetime of penury. I also think it could mean the difference between success and failure when it comes to investing.
Reminding ourselves that good times can’t last forever isn’t as easy as it first sounds. In raging bull markets, it’s easy to overlook the fact that many companies are likely to be trading at excessive valuations or that periods of outperformance are statistically likely to be followed by periods of underperformance (‘regression towards the mean‘). This time it’s different, right?
Sadly, no. At some point, something will come along to unnerve the markets. Frustrating as it may be, we’re also unlikely to see it coming.
Cheer up — the usefulness of recognising that markets are in a constant state of flux isn’t limited to the good times; it can also be a source of comfort when markets have tumbled and we’re left staring at a sea of red as we check in with our portfolios.
Think back to the aftermath of last June’s EU referendum vote. While the political elite squabbled, markets tanked. Those who focused on the short term may have sold their otherwise excellent holdings, perhaps at a loss. Those who remembered that the uncertainty would eventually pass and remained invested were likely to have benefitted from the huge surge in share prices over the last year or so. Hindsight is wonderful but the fact remains that most people investing for more than, say, five years could do a lot worse than greet each and every ‘cataclysmic’ event with a shrug of the shoulders.
So, having acknowledged that bad times invariably follow good (and vice versa) what should we do next?
First, keep some powder dry. Consider whether now might be an excellent time to start building a cash pile to take advantage of market dips. There’s nothing worse as an investor than being unable to snap up bargains when they appear.
Second, stick a note on your PC to remind yourself that nothing is permanent. Your future self will thank you for it.
Learn from others' mistakes
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.