Page 24 - DIY Investor Magazine - Issue 23

WHEN THE MARKET GOES TO HELL IN A HANDCART BY THE NIMBLE TRADER
Every so often the market goes to hell in a handcart; it’s the way it is. Something or someone, spooks the market and prices fall sharply; because they are falling, the rule of nature that says a body in motion tends to stay in motion.
Once panic sets in, things can get stupid in very short order and before we know it, everything’s going haywire.
For a day trader, increased volatility is probably very welcome; for an investor at the beginning of their ‘career’, shortly to retire or already retired, the loss of 20/30/40/50% of their portfolio’s value is less welcome.
For someone in the middle, accumulating their fund, sharp declines are a buying opportunity as they likely have new money to invest, but even so can be very frightening.
When I say ‘less welcome’ I’m being flippant; losing 50% of your money is in my experience buttock clenching at the very least.
THINK ABOUT THESE THREE DIFFERENT SETS OF CIRCUMSTANCES.
‘ONCE PANIC SETS IN, THINGS CAN EASILY GET STUPID IN VERY SHORT ORDER’
Scenario 2:
You did the ‘right’ thing all your working life; saved hard and invested wisely for your old age, you developed a system that worked, building a personal wealth fund of (say) £3m...
and retired to live off the income.
For the first 10/15 years it all went fine; you added no ‘new’ money because you were no longer working, but the portfolio trickled up in value and you lived off the dividends rather than re-investing them as you did when building the fund.
Then it all goes wrong; now in your eighties, good health and vitality a distant memory, you no longer feel sharp enough to handle whatever the market throws at you. When that savage bear turns up, you don’t have the confidence you had 25 years ago to follow your system for big declines; you freeze and watch in terror as your capital bleeds away, knowing you can’t replace it.
Scenario 3:
An investor part way through building their fund is the best placed of the three - ‘seasoned’ enough to be sanguine about bears as they have encountered one before. They have new money to invest, time on their side and if they’ve learned well, have the confidence that comes from experience.
However, no matter how experienced and confident you are, losing 50% of your money with no end in sight to the doom and gloom is debilitating to say the least.
Scenario 1:
New to investing, you’ve scrimped and saved to get your starting capital together, delayed gratification because you’ve not bought stuff, cut back, not gone out, made do and mended and what happens?
You buy into the market at the ‘wrong’ time, at a peak just before a savage bear turns up. OOPS, or words to that effect, you lose half your money in the first year. This can put you off investing for life; why try to be sensible just to watch your money get wasted and then evaporate?
If you’re going to do half of your money, you might at least get some pleasure; George Best famously said, ‘half my money I spent on birds, booze and fast cars... the other half I wasted.’
DIY Investor Magazine | Oct 2019 24