Getting the urge to ‘do something’ as the market crashes? Maybe you should

The markets are still jittery. The US rallied then dived yesterday. Europe and the UK are down this morning. China dropped back again, though not by as much as over the last few days.

Investors are wondering what comes next. China cut rates yesterday. People are talking about the Fed never raising interest rates again.

And I don’t know about you, but where I am right now, it’s raining. (Nothing to do with the market, but it does heap on the misery. What happened to the summer?)

At times like these, it’s easy to feel the need to do something.

And you know what? Maybe you should do something. 

Got a plan in place? You don’t need to do anything

When this sort of mayhem happens in the markets, the internet is chock-full of ‘sensible’ commentators, who parrot out their usual ‘calm down, dear’ columns, as if every private investor in the world would be throwing themselves off skyscrapers if it weren’t for the pearls of wisdom of a few financial bloggers.

Let’s be honest. This sort of thing is scary. It’s unnerving. It jangles you. I know, because like you, I’m only human, and I have the same greed and fear impulse as you do.

At times like this, it’s easy to feel the need to act. Either you panic: “Look at that fall! Get me into cash now!”

Or you think: “There must be some hot buying opportunities out there after all that.

Look at those big moves. I could have made a fortune if I’d been on the right side of that trade. Maybe I’ll take a punt on the rebound.”

And there’s so much information to process. A minute ago, the Fed was going to be raising rates in September. Now the world’s biggest name in hedge funds – Ray Dalio – is saying that the Fed will be starting QE4 before too long.

So what do you do?

The point is, this might be significant. Maybe what’s going on just now does make a difference, or mark a turning point in the markets. It’s not enough to just dismiss it with a toss of your head and point to a long-term chart suggesting that stocks always go up.

At the same time, getting entangled in the day-to-day movements of the market is a recipe for madness. Being glued to daily moves might be understandable if you’re a daytrader (though let me be clear that this is an almost certain route to misery and self-destruction – I find it fascinating that so many traders view Jesse Livermore’s memoirs as an instruction booklet, yet pay no attention to how he died).

But it’s far more likely that you are saving money for the long term, or that you are living off a pot of capital that is also going to have to last you for a long time.

And if that’s the case, then you should already have a plan in place. If that’s so, and it’s a plan that you’re happy with, then seriously – you don’t need to worry. You don’t need to do anything today.

Stick with your plan. Maybe revisit it later this month and review it. See if it’s still doing what you think it should, or if some of the underlying assumptions need to change. But don’t get all tangled up in making ill-thought through decisions and trades just because the market has fallen a bit more than usual.

If you don’t have a plan, then get one

On the other hand, if you don’t have a plan, then you should do something. You really should.

That something would be to get a plan in place, so that the next time everyone is panicking, you don’t join in.

Here’s the basics of what such a plan should look like. Know your goal and therefore your time horizon. Saving for the kids’ university fees? For retirement? For however many bonus years you get beyond your allotted three-score and ten?

Get an idea of how much you’ll need. Save regularly towards that goal.

What should you invest in? The shorter the horizon, and the more concrete the deadline (ie, if the market crashes the day before your target date, can you delay taking your money?), the less volatility you can accept. The longer the horizon and the more flexible the target, the more volatility you can accept.

Generally speaking, if you accept more volatility, you should be rewarded with more growth over the long run. In fact, if your target date is far off, you should be taking more risk.

Have a view on the markets. Buy what’s cheap. But accept that your view might be wrong. Hedge against that by diversifying. Nothing complicated – as far as I’m concerned, there are only five basic asset classes to split your funds between: equities, bonds, gold, cash and property (property is really only a subset of equity, but sufficiently different to consider separately).

And then rebalance regularly. If your actual asset allocation gets too out of whack with your ‘model’ asset allocation, then sell what you own too much of, and buy what you don’t own enough of. That way you automatically buy low and sell high.

Oh yeah – and always remember to keep your costs low.

If you have a plan like this in place, then weeks like this are easier to handle. You’ll still feel that nagging desire to do something. But you’ll be able to scratch that itch by realising that you are doing something.

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