• Investing can be emotionally challenging. With money on the line, participants are likely to experience stress and anxiety, especially given today’s complex economic backdrop.

• Successful investors work to master their emotions and avoid acting impulsively by having a plan (following an investment strategy), diversifying and avoiding loss aversion.

Anxiety affects all of us. However much we are told to stay calm in a crisis and that worry does not achieve anything, it is simply a feature of life that we must all accept and manage. This is true for clients and professional investors.

Experienced market participants are well acquainted with feelings of panic, greed and impending doom - they’ve felt all of those and more, perhaps within the space of a single morning!

The markets always recover

Emotions run high during periods of uncertainty, pushing investors to either rush to protect investments and adjust their portfolios, or take advantage of sudden opportunities. While taking advantage of volatility is an important part of investing, and investors generally look to buy low and sell high, this is tough to achieve successfully time after time. Stock markets have already priced in most events including rate hikes, unemployment numbers and management changes. Regardless of market shocks, markets have recovered time and time again.

Looking back, the stock market has not only recovered every time, but in many cases has gone on to new highs after dropping drastically. This has happened after all the big market events, including the Global Financial Crisis, the war in Ukraine, and Covid 19. In a capitalist economy, wealth is created by entrepreneurial activity, and that activity is rewarded over time with a return on the capital provided.

Source: Historical daily share price chart and data for SPDR S&P 500 ETF since 1993, adjusted for splits and dividends, to 7th October 2024 (USD).

Here, you can see all the up and down years. There are more up years than down years, but there are still lots of down years that investors must live through.

Source: Macrotrends.net. chart showing the annual percentage change of the S&P 500 index, back to 1927.

While the long-term average return of the US stock market is roughly 10% per year (based on the S&P 500 index), most people’s average return is less than half of that. A study by JP Morgan found that investors averaged a return of 2.9% a year, while bond and stock returns were much higher over the time frame studied.

Why does this happen? Because most investors buy and sell too much without knowing what they are doing. They buy and sell at the wrong time but think they are doing the smart thing.

Often anxious investors can assemble a compelling bear argument to sell their shares and, as advisers and investment managers, our tendency is to urge them to ignore these fears and downplay them. However, simply dispatching current anxieties accomplishes little for those in a highly anxious state. They will simply fill the ‘envelope of anxiety’ with new fears.

Instead, we should acknowledge the fears and the fact that they could of course play a role in affecting markets. Ultimately, for any investor to stay in the market throughout their life they must learn to sit with it.

It may help to demonstrate this point by showing how in every single year there has been a compelling bear argument for shares. The presence of a bear argument does not in itself provide a very good reason to sell shares. Indeed, if all that was required was a good bear argument none of us would ever stay in stock markets. It can help to simply remind ourselves of these bear arguments in each and every year and the return of the performance of the stock market throughout this period.

There is always a reason not to invest

SPDR S&P 500 ETF Trust. Returns shown are Total Return in USD. Source: FactSet, data from 31 December 1998 to 31 March 2024.

Have a plan - and stick to it

Having a plan is key to any investment strategy. Whether you do this yourself or outsource it to a professional, you will still need to have set investment goals and agree an acceptable risk budget based on your personal risk tolerance and your capacity to bear any short to medium term losses.

Understanding the nature of the investment and the potential outcomes will help you to feel more confident when things do not go your way. The FTSE 100 Index fell this week? Not too much of a problem - this investment is intended for the long-term, and you have contingencies in place for shorter term needs.

Discipline takes the sting out of short-term shocks in two ways. Firstly, it stops you from selling assets at a loss because you have the freedom to wait for the downturn to right itself. And secondly, it stops you from taking on more risk than you are comfortable with in order to make up for any losses you incur through panic selling. If you stick to your investment goals, then it makes riding out short-term volatility easy. You do this by not exposing yourself to details that might make you change your mind. If you’re diversified, you will have that peace of mind.

Diversify for peace of mind

Diversification is one of the most important tools available to any investor. Using diversification as an investment approach can also help you avoid getting emotional about your investments because a portfolio that is well balanced and diverse is less affected by swings in the market.

If you ensure that your portfolio is always well-balanced, you won’t need to worry as much about market swings, helping you invest with calmness and objectivity. This strategy will also help you to avoid making decisions as a result of loss aversion.

Avoid loss aversion

Loss aversion is the phenomenon by which people experience feelings of loss, failure or defeat more acutely than feelings of gain or success. Fear of loss affects investors in different ways. It can manifest in risky behaviour - like rushing to choose a new investment without proper consideration - or denial, where a poor investment might be held for loo long because the investor doesn’t want to feel like they have made a mistake. As elsewhere, careful research and a solid understanding of your investment objectives should guide you here.

To avoid acting on impulse and keep your feelings in check, a good investor needs to have the ability to cut the losses and extend the profits. This comes back to discipline, having a plan and seeing it through. Investing isn’t always about jumping on an opportunity, buying low and selling high or timing the markets. It should be about your own personal goals and timeline and having the tenacity to stick to your plan, even when the going gets tough.

Of course, clever illustrations and calming words alone are never enough. The only real mechanism to encourage people to stay invested through anxious investment periods and get the retirement they deserve is a long-term relationship of trust built with a trusted adviser.