The markets’ current volatility and the resulting headlines are causing many investors to wonder whether they should make changes to their investments in response to the uncertainty. But, time and time again, we have seen that, during a decline, market psychology takes an emotional turn that translates into unfavourable decisions for those who seek immediate relief by reacting to the news.
Accumulating capital by focusing on the long term
The simulation below illustrates the case of a hypothetical investor who, on three occasions, invested $10,000 at the worst possible time:
- just before the 1987 crash
- just before the bursting of the tech bubble
- just before the global financial crisis
But by maintaining a long-term approach and staying invested, rather than trying to predict short-term movements, such an investor can successfully accumulate capital over time.
Short-term movements difficult to predict
This demonstration illustrates two phenomena that are typical of the financial markets: the difficulty of predicting their direction in the very short term and their tendency to rebound subsequently. Thus an investor’s worst enemy is attempting to time transactions perfectly by buying before a rally or selling before a decline. Empirical studies show that investors who give in to this temptation more often than not find themselves undermining their performance, rather than enhancing it.
It is therefore essential to stick to your strategy and maintain a diversified, long-term investment approach. It’s the investment philosophy that Gestion FÉRIQUE and its managers abide by. This philosophy allows us to get through turbulent times and increase our capital over the long term.
