Should you listen to share market doomsayers?

Share market fluctuations may send the media into a frenzy, but should personal investors be driven to panic by the headlines? 

When Martin Luther King’s delivered his famous “I have a dream” speech at the Lincoln Memorial in 1963, it propelled an entire social and cultural revolution. It was a dramatic example of the power of language to sway an audience and drive opinions and attitudes.

However, powerful language is not always used for noble purposes. Take some of today’s media for example; a negative headline can influence public opinion and dictate an agenda with lightning speed – and not always with the purest of intentions.

This phenomenon seems to be particularly true in the case of financial reporting. Whenever a sudden dip occurs in the share market the commentary in the media and on the airwaves is often coloured with inflammatory descriptions like ‘market plunges’’, ‘freefall’ and ‘wipe-out’. If such headlines were a true reflection of reality, then you would expect hordes of personal investors to be penniless and homeless.

Fortunately such creative writing does not equate to sound financial advice. Share markets around the world continue to play a major role in helping investors, big and small, to develop their financial freedom.

Short term volatility vs long-term gain

Reports of market downturns will often refer to “investors taking big losses” or “having a massive wipe-out on the value of their portfolio”. While markets can of course have some dramatic movements from time to time, the key factor ignored by such provocative statements is that an investor will only crystallise such losses if they sell out of the market at the time they are depressed.

The reality is that investors who are using the share market properly are not likely to sell at the first sign of a downturn and will normally have a longer-term strategy that allows them to ride out any dips. Not surprisingly, panic and over-reaction do not form part of their investment approach.

The people who are prone to suffer losses on the share market are those who tend to treat it as a form of gambling. Trying to use the market as a way of making a quick return is fraught with danger and attempting to ‘pick winners’ in the short term is a high risk exercise. Investors who do benefit from investing in shares are more likely to be those who use shares investment as part of a balanced strategy within a long-term plan.

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The first rule of personal investment is to be clear about your goals

Match investments to goals

The first rule of personal investment is to be clear about your goals. Shorter term objectives should be served by investments that are not subject to volatile movements, such as fixed interest or cash. Longer-term goals mean you can invest in more growth oriented investments like shares and share funds, without the need to make sudden withdrawals, which may occur when markets are depressed.

As the media are keen to leap on every twist and turn in the market from day to day, it can test the nerves of investors who may feel unnecessarily compelled to constantly track the value of their share market investments.

Those who take a more considered approach will not feel this same pressure because they know that their share investments are targeted at long-term goals, which are measured in years, not weeks.

Where to get trusted advice

The bottom line is that ‘media hype’ is a poor substitute for getting professional advice. Constructing a portfolio that reflects your personal goals, risk appetite and time horizon requires a highly individualised and objective analysis of your situation. It is good to keep up-to-date with news and stay informed about the market, but be wary of using this as the sole factor influencing your investment decisions.

How do you feel about investing in the share market? Join the discussion below.