What to do in a falling market?

It is appropriate for most long term investors to have at least part of their portfolio invested in shares. A long term investor is someone who does not need access to investment capital for at least five years, and who may or may not require income from that capital. If you are not a long term investor and you own shares, you should question whether you have the right investment strategy.

The extent to which you invest in shares will depend on a number of factors, but mostly on how comfortable you are with volatility. All share investors know that shares can be volatile but that the effects of volatility reduce over time. The secret to making good returns from a long term investment in shares is to ride through the ups and downs. Don’t get caught up in the cycles of fear and greed. Keep your focus on the long term horizon; stay calm and confident. There will always be periods of time when putting your money in the bank will give you a higher return, but bank deposits are not a good long term investment.

Trying to switch between shares, when they growing in value, and bank deposits, when shares are falling, has been proven not to work as an investment strategy as it is difficult to identify the market turning points until well after the event. Make sure your portfolio is diversified, that is, you own shares in many different companies (either directly or through a managed fund) and own investments in other asset classes such as fixed interest and property rather than having all your funds in shares.

If you wish to reduce your exposure to shares either because you are uncomfortable or because you need access to your capital, it can be very difficult to assess the best time to sell. You can lessen the risks of uncertainty by selling up your portfolio gradually over a period of several months rather than selling it all at once and taking a chance that you are selling at the best time.