It is the curse of private investors to be both keenly alert to fluctuations in markets but, like Hannah Cowley, to be five minutes late all their life. Wild volatility in markets made the headlines last week. Hundreds of billions of pounds were wiped off global share values last Monday in the biggest sell-off seen since 2008-09.
As we absorbed the latest news, considered the implications, decided which funds and trusts to sell, screwed up our courage, we finally phoned the brokers or placed sell orders on our online accounts.
But by that time, we weren’t selling into a rout but into a rally. In electronic markets dominated by programme trading, not just the volume of trades but the direction of markets can change instantly. Even by the time we have heard the news, markets have not just fully priced in the implications of the latest scare but have more often than not overshot.
Little wonder that we feel condemned to feeling five minutes late. Either we install a large desk, order in triple computer trading screens like Gordon Gekko and get up at the crack of dawn or resign ourselves to the role of Tail-End Charlie.
For dedicated investors, market volatility is welcome. Big profits can swiftly be made in those huge rises and falls. But for the vast majority of private investors, few periods are worse than wildly fluctuating markets. They are deeply unnerving. We are compelled to respond in a panic. And in most cases decisions made in conditions of panic prove to be ruinously timed.
Last week provided a startling example. A near 9 per cent drop in Chinese share prices last Monday drove investors out of equity funds.
But barely had investors time to breathe a sigh of relief that they were out of plunging markets than a rally set in. The Vix volatility index fell 50 per cent from Monday’s intra-day peak, and by the end of the week both the S&P 500 Index and the FTSE100 Index closed higher. The FTSE World index closed 1.9 higher over the four days, despite the shock crash.
That still didn’t spare investors from the pain of losses over the month and indeed the year. And the mood remains understandably apprehensive and edgy.
Nevertheless, it was a miserable time for the more doom-laden market soothsayers in America. Having lost no time predicting that we could be on the cusp of a financial crisis on the scale of 2008-09 and that pending interest rate rises by the US Federal Reserve would be put on hold, they were floored by a sharp upward revision to US second quarter GDP growth from earlier estimates of 2.3 per cent to an annual pace of 3.7 per cent. By the weekend pundits were urging investors not to panic, that this was a correction not a crisis, and that here in the UK small and mid-cap funds and trusts had been largely spared.
But what advice can be offered to investors worried that they seem permanently condemned to be lame followers of market trends, with little ability to dodge those vertiginous swings in markets?
What can help is diversification by asset class, with savings spread over cash, deposit accounts, fixed interest and bonds as well as shares.
Having a medium to long-term plan for retirement savings is also critical. It should not be necessary for investors to be constantly on edge over their pension plans, but able to take comfort that they have a spread of investments so that more resilient performance in some areas helps to cushion sharp fall-outs in others.
And it helps to spread the timing of investments so that the angst of being five minutes late every time we look at our savings is much less acute. We may be condemned to being forever “late”. But smoothing the timing of investments could see us on occasion five minutes early.
Annual report overload
Keen to keep tabs on the companies you have invested in but feel intimidated by the length of annual reports? Join a growing crowd. Research by accountancy giant PwC finds that the size of these reports may be obscuring key information.
In a snapshot of its upcoming report, ‘Searching for Buried Treasure’ due out in September, it finds that explanatory notes to the financial statements of bank accounts are five times longer than the statements themselves in the FTSE100. Ever more demanding regulatory disclosure means companies have to give voluminous information – but the result is often more confusion and uncertainty among investors – not less. Leave it all to the professionals? I don’t think so.