Despite being bombarded by emails and adverts about seasonal sales from retailers, there were no equivalents in the financial press where headlines normally read like, “Investors left reeling as markets tumble” or, “Where next for markets amidst BREXIT turmoil?”.
The world of investment is unique in that shoppers (investors) are often scared to buy when prices fall. In any other walk of life, falling prices normally entice people to grab a bargain.
The fear of buying when prices are falling is that they continue to fall, and what you thought was a bargain, could have been an even bigger bargain at some point in the future.
This emotional aspect to investing is powerful, but not helpful.
Let’s go back to basics to help explain exactly what’s going on in investment markets on any given day, whether they are testing new highs, or plumbing new depths.
Investment markets act as forward-looking pricing machines. Sellers and buyers come together on a minute-by-minute basis to set the most appropriate price for every security listed on the market. The collective wisdom of all market participants about the issuer of a security, and the potential impact of current and expected future economic and political events, means that all relevant information is incorporated into a share or bond price.
The fact that shares or bonds are priced lower at any given point in time simply means that there is greater uncertainty about the issuer or how future events could impact it. In times of increased uncertainty, buyers of securities (yes, there are still buyers out there!) will want to pay a lower price to protect their potential downside, whereas sellers may take the view that they cannot stomach any further price falls, so “A bird in the hand is worth two in the bush”.
No matter what the background issue is – interest rate increases, inflation or BREXIT – markets price the underlying securities appropriately for the level of uncertainty present. You can therefore be assured that you are buying or selling at the right price at any given time.
The way to make sure you have the greatest chance of a successful investment experience is to put your money to work for a long enough period of time and not to let your emotions get the better of you when the news is particularly gloomy. Remember, good news doesn’t sell papers or magazines.