Investments: Should You Cut Your Losses and Run?

We are two months in to 2016 and it already feels like we have a years worth of market activity to talk about.

Reading the papers and watching the news, you may feel like the credit crunch is not long forgotten. We have seen the FTSE100 move in to a Bear market, which means it has dropped by more than 20% from its peak in April 2015. China is slowing down, oil prices have fallen off a cliff and the UK may exit the EU.

Before you go and sit in a dark room and listen to some Coldplay, take a few minutes to consider what I have to say…It might prevent you from making a mistake and even profit from an opportunity.

Risk is not a surprise to most investors, but the typical reaction is to cut your losses and run. Ask yourself this; “Would you sell your home if it dropped by 20%?” For most, unless you are forced to, the answer is no. Most home owners will forget about the drop in price and be thankful that there is a roof over their head.

Although your investments may not be a roof over your head, the principle is the same. What difference does a price drop mean if you are not selling… Nothing! Keeping invested gives you every chance to benefit from a recovery as and when it comes in the markets. Reacting in an emotional way is why a lot of investors we see have had bad experiences in markets. They sold at the bottom and didn’t ride the recovery back to profit.

Again using property as an example, if prices dropped 20% and you were renting, wouldn’t you think it would be a great time to buy? I know I would and I did during 2009. The same again is said for investments. With markets down by 20% from their peaks, you now have the opportunity to benefit from cheaper prices.

It’s hard to remove emotion from the decision, particularly when hard work will have gone in to generating your savings and investments. But markets are irrational at times and so you need to have a logical approach to your investments. We particularly find that during these periods, having an adviser to hand is what helps many clients to make sensible choices.

So with markets jumping up and down on a day to day basis and cash remaining a low interest environment, where can you find returns?

Government Bonds and Gold have seen positive movements in 2016. This is mainly prompted by the falls in shares. When shares wobble investors go to government bonds and Gold as safe havens. We have also seen a lot of UK commercial property investments continue to do well to. The issue here is that 6 months ago, investors were running away from Bonds and Gold. So although they are in favour now, how long will that last?

My opinion, for what it’s worth, you should stop trying to second guess the market. It is irrational, vain and doesn’t like to admit when it is wrong. The key for those who are invested or considering investment is to think about how long you can commit and make sure you seek advice in terms of how to spread your investment between good quality assets. The saying goes “It’s not your timing, but your time IN”.

An investment that is well diversified and invested in to quality funds is the simplest strategy to making long term returns. This approach along with simple logic is what we use at Ellisons Financial Planning to help clients achieve their goals and beat the returns that cash is otherwise offering.

Please note: A decision to invest should not be taken just on the basis of this article. The opinions above are not advice and before investing you should seek advice from a regulated adviser.