Watching your investments lose value is uncomfortable for any investor but that’s especially true if you’re new to financial markets – writes Ed Monk

The pandemic prompted many people to begin investing for the first time and now, with markets having their first serious wobble since then, these rookies are getting a lesson in market volatility. Some are choosing to sell.
Here’s four questions they should ask themselves before they head for the exit.

What are experienced investors doing?

Or to put it another way – what would Warren do? Warren Buffett is the world’ most famous investor and one of his most-quoted sayings is that his ‘favourite holding period is forever’. That means hanging on in through the good times and the bad.

Part of Buffett’s legendary investing success is his incredible staying power, which has allowed his returns to compound for more than seven decades. You don’t do that if you sell at the first sign of trouble.

Do you have recent losses in perspective?

No loss feels good, but they are an inevitable part of investing. The belief that all investors share is that the ups will outweigh the downs in time – and on that point history is on their side.

As the chart below shows, even historic falls like the ones experienced during the dot com crash in 2000, the 2008 financial crisis and the pandemic in 2020 tend to be recovered in time, and markets move on to hit new highs.

Stock markets have overcome setbacks before

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Those investing for the first time over the past two years are likely they have seen their money grow significantly, even taking recent falls into account. For example, the S&P 500 index of leading US companies is around 17% higher now than a year ago. Even if you had invested at the peak around the start of this year, your money would be down just 3.5%. Please remember past performance is not a reliable indicator of future returns.

Is that really a reason to sell?

When will you buy back in?

Selling out of investments doesn’t require getting one decision right – it requires two. You first need to sell before the market falls further but you then need to decide when to buy back in, again running the risk that you get your timing wrong.

Very few investors, if any, have been able to successfully time markets in this way. What’s more, if you’re deciding to sell because recent falls are making you uncomfortable, it’s likely that you’ve already missed your opportunity to ‘sell high’ – you are simply locking in losses if you sell now.

Where else will you go with your money?

If you’re selling investments you’re likely to need an alternative home for your money. Many will turn to the perceived safety of cash savings accounts – but don’t think your money can’t lose value there.

The best paying cash accounts return around 2%, but with inflation running above 6% currently you’ll be losing value in real terms. And that loss is guaranteed as long as prices continue to rise as they are.

Investing money means the risk of loss as well but also the chance to keep pace with, or even beat, inflation.

Learn more about investing in uncertain times

Five year performance

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