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RP: The coronavirus crisis has been very stressful for some investors, but not so much for others.
At one stage, stock markets were extremely volatile. But investors who kept their nerve have been rewarded.
Greg Davies is an expert in behavioural finance.
GD: Clearly anyone who happened to have at their disposal a crystal ball might have done quite well in these times, but given that no one does, that’s not really investing that’s gambling. And I’d say the investors, the proper investors who have done best through this time are in fact the ones who are doing what they always should have been doing which is sitting tight, waiting for the long term, seeing things through, rebalancing periodically as the markets adjust.
RP: It isn’t always easy to stay calm when other investors are panicking. So, what’s the best strategy when markets fall?
GD: Well, I think the best strategy in any time, up or down, is to follow your plan, is to stick to your principles, and those principles should really be: be invested for the long term, so first figure out what money you need for spending purposes in the short and medium term, set that aside and put the rest to work. And then beyond that, get into a diversified portfolio of an appropriate risk level, and stick with it, don’t be responsive to the ups and downs of the market, because, if you are an investor with a five year plus time horizon, then, the ups and downs today or tomorrow, firstly, we can’t control them, secondly, we can’t predict them, so the best possible thing for you to do is to stick to your plans and wait it through.
RP: It’s during a crisis that having a financial adviser can really pay off — someone who knows your circumstances and understands your personality well.
GD: In times of stress, in times of crisis, what essentially happens is we become emotionally involved with the short term. And when we become emotionally involved it becomes very difficult to stick to the plan, or to objectively push emotions out of the decision making process. So, having someone else who is not as emotionally involved in your portfolio as you are, it gives you that emotional distance between you and the decisions, so advisers can be extremely helpful for that reason.
RP: Nobody knows what the next big crisis will be — but there’s bound to be another one sooner or later. The challenge is to be prepared.
GD: What we should learn from this crisis is stop trying to hyper-optimise everything. Focus instead on building general resilience, on making sure that you have a buffer in place, so that you’re not forced to sell when you need to draw money when you get furloughed and your income dries up.
But it’s not just financial resilience - we need emotional resilience, we need health resilience, if this crisis has taught us one thing, it’s that, financial crises don’t just come as financial crises. It’s packaged up with a health crisis, and a social crisis, and an economic crisis, and all these things together mean that you can have the most financially resilient situation in existence, but at the same time you may be having stresses socially or stresses emotionally because of health reasons.
So, work on your resilience — and not just your financial resilience. It’ll stand you in good stead, whatever the future holds.
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