by Ian Campbell
Director & Chartered Financial Planner
This is a proverb from the world of investing, as I will explain, but inspired by the goalkeepers in the recent European Cup Finals.
The memory of the England defeat after a penalty shoot-out may still be too raw for some. But others may still be ruminating over ‘What’s the best way to save a penalty?’
There are of course hundreds of different theories, but apparently one of the most successful strategies can actually be to stand perfectly still, in case the player kicks the ball down the middle.
Imagine putting this into practice though! The natural tendency with most things in life is to act and react. Standing still and doing nothing goes against all our instincts.
In financial terms, however, we’d abide by this theory wholeheartedly, while understanding why it feels so unnatural to many.
For most people, the natural reaction in the face of market movement is to react to it, but the best thing you can do is in fact do nothing.
Let’s take a look at this by taking a look at ‘tracker’ funds
A tracker fund is built to reflect the current structure of its relevant index, perhaps the FTSE All Share Index. While it would not buy stocks in all of the companies, it would proportionally mirror the index by industrial sectors – 15% of its holdings might be oil and gas, 15% of its funds might be invested in tech stocks, another 20% might be in financials such as banks and similar companies, and so on. You could call it a ‘mini-FTSE’.
Once this is done and the fund is set up, nothing is changed. The fund is left well alone to ‘track’ the FTSE index. Hopefully it will keep up with its growth, while the tracker fund managers, who understand the potential benefits of staying in for the long haul, ride out the perfectly normal ups and downs of the stock markets, through thick and thin, for richer for poorer, in keeping with their mantra: whatever you do, do nothing.
It’s all about staying invested for the long term, not panicking when markets go down – as is perfectly normal – because they will surely come up again. History shows that over the long term, investments in stocks almost always far outperform cash.
However, it’s crucial to make your decisions based on sound, qualified, professional advice and to tune out the noise
Now. As you may have noticed, the Tokyo Olympics went ahead, but without the noise of large crowds this time. This reminds us of another key aspect of investing: the noise.
Do not be swayed or distracted by the din of uninformed investors who spit the dummy at the first downward blip in their investments. They do not see that, if you only hold your nerve and keep your money in there for the long term, it will grow, because downturns right themselves and come back up.
It can be hard to do, to steel your nerve, but as we said above, in terms of staying invested over the long-term, once your investments are made, the motto is ‘do nothing’.
The most important point is that, in terms of seeking our qualified financial advice, the motto is quite different - contact us!
*LCP: Have Pension Freedoms Cost Savers £2bn in Lost Returns?” 7 July 2021