The Motley Fool

Why You Should Not Fear Sharp Share Price Movements

The world is once again awash in turmoil and trouble, and investors are seeing sharp swings in share prices in both directions almost on a daily basis.

The troubles seem never-ending with the on-going trade war between the US and China, the rapid and sustained fall in emerging market currencies, and the slowdown and debt build-up in China. All these problems have seemingly contributed to the quick and sudden share price movements, which is known as “volatility”. However, should volatility be a good reason for the investor to feel scared and to hesitate from investing?

News headlines constantly blare about volatility, and this causes everyone from fund managers to the average Joe to talk incessantly about how risky it is to invest and to adopt a “wait-and-see” attitude. But let’s take a step back and ask ourselves: What’s important in investing and what are our goals in relation to investing?

The answers for the above questions should be, respectively – the business prospects of each company we are investing in, and to build and grow wealth slowly but steadily over a long period. I think most investors would agree that investing is an effective way to compound our money over time, but what most people don’t bargain for are the emotions and psychology which come along with it.

To stay focused on our end goals, we have to tune out the noise studiously and ignore the “talking heads” on financial news who prognosticate and predict every single market movement.

Jumping in and out of the market increases our overall trading commissions, which are frictional costs which will eat into our returns. Staying out of the market due to fear and uncertainty would be just as bad as this means that the investor would miss out on the compounding effect from staying vested in good, strong and stable companies.

The objectives, therefore, would be twofold. One should i) focus his attention, time and resources on understanding the companies he invests in; and ii) manage one’s emotions so that volatility does not scare you into selling everything and staying in cash. With the current market downturn, this should prompt the astute investor to seize the opportunity to buy more great companies on the cheap.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.