Monday, 14 July 2014

Seeing Red

The standard advice to novice investors like me is "Don't keep checking what your investments are worth, turn off the portfolio tracker". The reasons for this are pretty obvious - the markets are inherently volatile and humans are inherently "easily spooked" (or most of us are).

My portfolio tracker currently looks like this:

Portfolio nameHoldingsGBP
of total

So, according to Prospect Theory (people tend to be influenced more by the "prospect" of an investment - i.e. whether it is rising or falling than its actual value), I should be starting to feeling the fear and itching to do something about it. However, because I know that red in a portfolio tracker is inevitable due to the way the markets work, I'm happily keeping irrationality at bay.

Personally I don't believe that the way to deal with volatility is to pretend it doesn't happen and refuse to see it. Ignorance is not bliss as far as my investments go. I used that tactic for years and I'm sure their value suffered because of it. But the key here is "informed" involvement.

Knowledge of how things work does help to damp down our inbuilt emotional reaction to risk. I know that flying is statistically very safe, planes do not fall out of the sky (or do so very rarely). They are engineered so that this is virtually impossible and pilots are highly trained, skilled individuals. In the same way markets tend to recover and continue to rise, and periodic set backs are part of this process. Rationality insists that we sit tight when the markets drop, buy whilst prices are low and wait.

However, if the red figure on my whole portfolio reaches double digits and stays there for a while, which, my reading tells me it mostly likely will at some point, it might be more of an effort to keep my nerves steady.

I have a strategy for dealing with my nerves when a flight becomes a little bumpy and it involves several stiff gin and tonics. I'm not sure that this is quite what financial experts have in mind when they advise how best to deal with stock market turbulence by saying "chose a strategy and stick to it."


  1. I used to check my investments every day. I now check them most days but am confident that I won't sell when the prices start tumbling (imminently, according to some 'experts'). Although that's not to say my nerves won't be jangling like yours!

  2. Yes, there are probably "interesting" times ahead. My CIS fund has probably been up and down like a yoyo many times before but I haven't been taking any notice until fairly recently so it didn't bother me.

  3. Cerridwen

    They say the difference between normal people and brave people is not that brave people don't get scared, but that they manage to keep their fear under control better, and it can therefore increase their performance (adrenalin I guess).

    I have generally managed to avoid selling in market downs, kept buying through the financial crisis, and with one exception have benefitted from this (prices have recovered plus a bit, and also received the dividends along the way.

    Best Wishes
    FI UK