4 key lessons about investment markets

The number of ‘DIY investors’ is increasing. But for all the apps promising to make it easier, going it alone in the stock market without professional advice can be a real challenge.

A survey of retail investors by EQ last year found that a growing number of shareholders felt they were making uninformed decisions – a dangerous position to be in when it comes to your money. Furthermore, nearly half of jittery investors felt the need to sell off some of their shares due to the cost-of-living crisis.[1]

Here are four lessons we believe it’s important to remember when it comes to investing:

1. Sometimes stock markets are totally detached from reality

The UK is set to enter recession this year; inflation is at its highest in around 40 years; and the country is being hit by waves of public sector strikes.

With all this bad news, it’s perhaps surprising to see UK markets on the up. The FTSE 100, consisting of the top UK-listed companies, is at its highest since 2018.

That’s a tricky thing to get your head around. Surely investors should be stampeding away from the UK market, not piling in?

But markets are forward looking. They don’t necessarily reflect what’s happening right now, but what investors think is going to happen in the future.

In theory, this means everything – recessions, inflation, interest rate hikes –are all ‘priced in.’ The only time markets should see a dramatic drop is when something happens that investors didn’t expect.

Understanding this means having to think several moves ahead and many have lost money gambling on what markets will do next. The best long-term strategy is to pursue a long-term financial plan that will naturally factor in the stock market’s approach.

2. For every right prediction, there’s a wrong one

At this time of year, a lot of the bigger investment houses like to come out with their forecasts for the year ahead. We get bold claims on what will or won’t happen, or stocks that will soar or fail.

We just need to look at the pundits who failed to predict a Trump win in 2016 to know it’s easy to guess wrong.

As this article from CNN discusses, analysts trying to guess how 2022 would pan out were well off. Goldman Sachs predicted the S&P 500 (a commonly followed index of large US companies) would end the year at 5,100 points. Morgan Stanley was more conservative at 4,400. The reality? The index suffered its worst fall since 2008, and ended up down at 3,829.

What’s the lesson here? There’s a lot of noise out there. We say it’s best to ignore it and instead have a long-term plan that adapts to what’s ahead, rather than following bold predictions that fail to come off.

3. Diversify, diversify, diversify

Markets have recovered since the start of the year (the S&P 500 has climbed back up since December). But it’s interesting to see what the story is behind those headline figures.

Earlier this year, Nate Geraci, president of US-financial planner ETF Store tweeted that just five well-known stocks – Apple, Amazon, Tesla, Microsoft and Facebook’s owner Meta – were responsible for half of the S&P 500’s losses over the previous year 12 months.

At the same time, around three quarters of stocks in that index were up 20% from their 52-week lows. For us, this supports our belief in a key investment strategy – diversification.

You’re spoiled for choice as an investor – across the world there are in theory more than 58,000 listed companies to choose from. But often it’s only a small handful we end up talking about.

It’s very easy for investors, particularly inexperienced ones, to follow the herd. That can be a potentially big error.

4. Things are not always as bad as they seem

Fear is a big driver in investing. It might be a company’s poor results, or some negative headlines, but when investors get nervous, it can sometimes lead them to extreme measures and forgetting important factors such as company fundamentals.

Unfortunately, bad news sells. There are far fewer column inches devoted to the FTSE’s current positive state than there would be if there’d been a market crash.

But as we said in a recent post, the headlines aren’t always as bad as they first seem. Fluctuations in the market are likely to only be short term. A negative story about a company might not have a lasting impact on its performance. While it’s sometimes tempting to drastically change strategy, that’s not necessarily the best course of action for the long term.

The golden rule

With these lessons in mind, we can all benefit from taking advice rather than going it alone. Our team can help you remain objective as well as support you in visualising your financial future.

Please get in touch today.

[1] EQ Shareholder Voice 2022