The emotional challenges of staying invested

May 6, 2009
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, NAIROBI, Kenya, May 6 – The global markets are undergoing a challenging and turbulent time. In such times, emotions may play a significant role in investing decisions. Investors often feel the variances in their portfolios’ performance much more than the average return over the life of their investments.

The biggest challenge comes about during the volatility of markets where investor confidence is low and many decide to count their losses and opt out. The key in such cases is to focus on the long-term. History has shown us that it is important to stay invested in good and bad market environments.

What investors need to understand is that declines in the market present opportunities. It is simple logic. Buy cheap and sell high.

Great investors have shared their lessons with us. “Don’t be fearful or negative too often. For 100 years optimists have carried the day. Even in the “dark” days, many professional individual investors made money in stocks. Of course there will be corrections and even crashes, but over time, stocks go up.

The cycle begins with investors being optimistic. This optimism results in investors purchasing shares and pushing their prices upwards. With continuous excitement, prices reach their peak. This is usually the riskiest time for investors. However, confidence begins to reduce and with it investors become nervous. By the time stock prices reach their trough investor confidence is at their lowest. Like a cycle, consumer confidence starts increasing and with it the prices of shares go up once again. 

Ben Macintyre a leading columnist wrote “It is said that confidence is the soul and fuel of finance. Too much results in speculative mania, bubbles, booms. Too little destroys credit, the gears of finance seize up. None at all results in panic.”

News is very important in either boosting or reducing investor confidence. The news of the economic stimulus plan had a positive effect on the markets unlike the collapse of several financial institutions that had the opposite effect.

Optimistic investers usually review their expectations over time depending on the profitability outlook of the company or fundamentals that could affect earnings over time. Consumer confidence is critical not only to the stock market but to the economy in general.
When stock prices begin to rise, consumer confidence increases. The opposite happens when consumer confidence falls.

It is important to keep emotions out of stock market investment. Time in the market rather than timing the market in line with market fluctuations is likely to earn great investors greater returns in the long term. It is always important to consult your financial advisor before making any investment  decisions.

(Renaldo D’souza is the Marketing and PR Coordinator at Winton Investment Services Ltd, an Offshore Investment Advisory Company based in Nairobi)

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