Five mind tricks to keep investors on track in turbulent markets

Mind over matter: Practical steps are only one part of the battle

It is a difficult time to be an investor. 

Millions will be experiencing the pain of watching their portfolio drop in value as most stock markets around the world have fallen so far this year. 

Investors will also be feeling a rollercoaster ride of emotions thanks to severe volatility that has set in. 

There are many practical steps you can take to protect your portfolio, as we have laid out in Wealth in recent weeks. 

Actions such as making sure it is balanced – across asset classes and stock markets – and that you are keeping investment costs down and investing for the long term.

However, practical steps are only one part of the battle. Dealing with emotions is also necessary to keep on track at such a difficult time. 

Louis Williams is head of psychology and behavioural insights at financial software firm Dynamic Planner. 

He says: ‘Our emotional resilience, confidence, and optimism – despite what is happening around us – is key to bouncing back and being agile during these challenging times for investors.’ 

Williams believes that investors who are able to successfully navigate through times of financial turbulence share key traits. 

Here are our tips to cultivate such mental skills to better weather any future investment storms. 

1. Get comfortable with uncertainty 

Investors are having to compute a seemingly endless list of unexpected events – from a global pandemic to the invasion of Ukraine and rapidly rising prices. This lack of control and predictability can be anxiety-inducing. 

A natural reaction can be to attempt to take control by selling investments and turning our backs on the chaos. 

However, this simply locks in losses and cuts off our ability to benefit if and when stock markets bounce back. 

So the key is to find other ways to get comfortable with the uncertainty. Instead of focusing on the latest twists and turns, step back and look at the bigger picture. 

There have been numerous market falls throughout history and prices always bounced back again. It can take time – but there is usually a recovery. 

Greg Davies is head of behavioural finance at consultancy group Oxford Risk. 

He says: ‘In turbulent times, there is a big gap between the decision that feels emotionally comfortable for my short-term self – selling – and the decision that is right for my long-term needs – holding on. 

‘As humans, we constantly deviate from good long-term decisions in pursuit of the emotional comfort we crave in the short term. This is costly – we are effectively buying emotional comfort by giving up financial performance.’ 

But he believes that individual investors have a huge advantage over professional investors: time. ‘Benign neglect – just leaving things alone – can be a very powerful investment strategy,’ he says. 

You cannot change the way stock markets behave, but you can control how much you pay in investment fees and tax. So ensure you use your allowances, such as the Individual Savings Account, which allows you to invest up to £20,000 tax-free every tax year. 

2. Learn to regulate your emotions 

It is hard not to allow your emotions to be buffeted by market rises and falls. After all, portfolios aren’t just money, they’re our means of financing dreams, holidays, helping our families and being able to retire. 

However, emotion can sometimes cloud our judgment, for example by making us too quick to react when we are worried. 

If you have built a well-diversified portfolio for the long term, there is no reason to check it frequently. 

Emma Maslin, money coach and founder of The Money Whisperer personal finance website, says: ‘In a world where we are used to checking phone apps several times a day, it’s all too easy to be hyper vigilant about the value of our investments. 

‘But investing is long-term and investors shouldn’t need to check investments too often, and certainly not numerous times a day. Perhaps delete your investment app if you are prone to checking it frequently and fretting.’ 

Also, remember the good times. Your portfolio may be down in value this year, but it is likely to be up over the past three years. Looked at in a wider context, things may not look so bad. 

Clive Beagles is senior fund manager at investment fund JOHCM UK Equity Income. 

He says: ‘During periods of market sell-offs, the natural human reaction is to reduce our time horizons and focus on short-term negative noise. 

‘It’s at such times, when our instincts may lead us in the wrong direction, that a well-established investment process can help to avoid behavioural pitfalls.’

3. Boost your confidence 

When the value of your portfolio is falling, it is easy to start seeing it as a reflection of your abilities as an investor. 

A lack of confidence in your financial plan can increase the risk that you will start tweaking and going off track. 

So, remember why you made individual investment decisions in the first place. If your rationale has not changed, you can feel confident that you are still on track. 

Also, swot up. By reading up on why your portfolio is falling, you should reassure yourself that most investors are in the same boat. 

4. Curb your impulses to trade rashly 

Investors often mistakenly make rash decisions based on emotions rather than strategic thinking. This is normal. Yet there are things you can do to limit or prevent the resulting damage. 

First, think about what is driving you to trade a particular investment. 

For example, when buying, are you interested because it is the right investment for you, or because you fear missing out on an opportunity where you see others making a huge profit? Don’t let others’ decisions sway you. 

Second, drip-feed money into your portfolio instead of adding lump sums. 

That way, you minimise the risk of a market fall just when you have invested. It also saves you from trying to time the market, which is an almost impossible feat. 

5) Boost your resilience with a cash buffer 

Don’t invest money you will need soon. Market falls are stressful enough, but if they wipe out money that you could be using to live on against a backdrop of rising prices, they can be especially painful. 

Make sure you have a healthy cash safety net before putting any more money into financial markets. 

You should have the equivalent of around three to six months of outgoings in cash before you start investing – or more if you are using your investments to live off (in retirement, for example). 

By having a cash buffer, you do not have to sell when markets fall, locking in losses. 

Also, pay down any unsecured debts. Reducing debt improves your financial resilience as you are less exposed if interest rates continue to rise – as they are forecast to do – or your income drops.