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When markets crash: The one thing long-term investors should do

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By Rory Gilbert - September 02, 2015

It's a marathon, not a sprint

When markets gyrate, it can be tempting to try and pick the bottom in the hope of buying a bargain. 

At its extreme, day traders move in and out of stocks frequently, trusting their analysis or instinct to tell them when shares have sold off, or when they have peaked.

Why market timing doesn't workHere at AES International, we don't generally subscribe to market timing as an approach that most investors should follow, and there are a few reasons for this.

First, trying to 'call the bottom' means that you also need to find some way to 'call the top', and sell out of positions. 

While it sometimes may seem clear (like last week) that markets might have over-reacted and sold off, it is rarely so obvious when markets are soaring.  Of course, markets do reach a peak, and then decline, and these moves can be dramatic.  Investors who held on to their positions rue their inactivity.  But bear in mind that, no matter what your friends in the Golf Club tell you, very few people are smart enough to buy right at the bottom, and even fewer are able to sell at the top.  In fact, this is notoriously difficult, and getting it right earns instant fame for those commentators who call the top.  Unfortunately, very few of them manage to do so consistently, so following their advice can be expensive, even if it were possible.  It’s important to remember that most individual investors are unable to access cheap, highly efficient trading platforms and almost none of them have the analytical tools, time or experience to try and pursue a timing approach.

Second, trading in and out of markets is pretty expensive and the returns that you hope to make can get eaten up by the transaction charges, and the bid/offer spread, on even the cheapest trading platforms. It's why the traditional approach, 'buy and hold' is broadly right.  At AES International, we don’t think you should hold everything forever, but trading in and out introduces the risk that you get it wrong, on top of the costs of trying to time things.

In our view, the most important thing for any individual long-term investor is to have, and follow, a basic plan:  if you know how much you want to invest in each asset class, you can use regular reviews and market weakness to add selectively when it looks like bargains might be starting to appear.  Similarly, when markets have rallied and your asset allocation has moved away from your target, it is a great time to take profits, and readjust your portfolio to bring it back into line with your objectives. 

We wrote to all of our clients last week to recommend that they use the market opportunity to add some exposure, and we suggested some ways to do it. 

We will very rarely do this but, over the last few weeks, we thought long and hard about where markets were going and our assessment was that the market declines were exaggerated. 

Even though those trades have all done well over the last few days, it isn’t time to do a victory lap.  Instead, we suggest that our clients continue to look at markets over the coming weeks to see where there are other ways to add to their portfolios:  markets remain well below their peaks and we think that there may be further chances to pick up some long-term investments at excellent levels.

In any case, we are in a marathon, not a sprint:  we want our clients to buy well, to hold for the long term, and enjoy the fruits of their investments years, perhaps decades, from now. 

So, as we head into the end of the summer, the kids go back to school and the weeks on the beach fade into memory, our recommendation is to take the opportunity to review your investment plan.  Now is the perfect time to work out what you need to do to bring your portfolio into balance, and make sure you know where you need to do the trimming and adding that will take advantage of some of the heightened volatility that we continue to expect. 

At AES International, we want to help – to work out where to start, download today our FREE guide to Do-It-Yourself Investing and call us on +971 (0) 4450 2500 when you've worked out where you'll need our help to get started on your portfolio update.