What are you thinking?

What are you thinking?

Equity markets have been skittish lately. Since the start of 2016, the ASX200 is down around 9 per cent, with particular pressure being felt by the major banks that make up a large part of the index, but price declines are also being felt more broadly, driven by a range of global macro and liquidity concerns.

At a time like this it is natural for investors to become acutely concerned about the downside, and to feel a pressing need to take action – usually selling to avoid the risk of further losses.

While this is a natural response, it also tends to be an unhelpful one. Trading on emotion is one of the more destructive things investors can do, and at a time like this it can be helpful to step back, take a couple of deep breaths, and ask whether your decision making is as rational as it can be. There are a couple of things that are worth keeping in mind as you do this.

Firstly, it is enormously difficult to predict where markets will go next, so if your strategy is based solely on extrapolating the recent weakness, it may be off to a weak start. It should be acknowledged that, statistically, financial markets do exhibit trends, and that volatility tends to be followed by more volatility, so there may well be more turbulence to come, but these effects are at the margin and for a long-term value investor, should not present grounds for a wholesale change in strategy.

Value, on the other hand provides a sound basis for guiding long-term investment decisions. When share prices fall sharply, and investors become emotional, value opportunities tend to be more apparent. There may be more pain to be felt in the short term, but over the long haul, being rational when others become emotional is how value investors make a lot of their money.

Finally, if you have chosen to invest in a good quality business on the basis of a sensible long-term assessment of its value, then short term market gyrations should not alter your investment thesis. If long term prospects for the business have changed then your valuation should change, but a sound investment case should be largely immune to the market’s mood swings.

In summary, while it is natural to feel heightened emotions when the market starts to turn difficult, it is important to keep these emotions out of your investment decisions. This is one of the most critical drivers of long-term success.

Tim Kelley is Montgomery’s Head of Research and the Portfolio Manager of The Montgomery Fund. To invest with Montgomery domestically and globally, find out more.

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Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.