I do spend a lot of time referring to psychology and the impact of human emotion on the decision making process. Today's discussion is not about the gut wrenching falls and the feelings of "CASH OUT AT ALL COSTS!!!" but its polar opposite - What happens when things go up!
Funnily enough, the decision made during this "rally" and surge in market value is instinctively the same as if it were to plummet. Some investors see short term "paper profits" and decide to cut and run. While this seems like a fine way of "locking in profits" - you must be wary of capital gains tax implications and also the long term vision of your investment.
For a few people who happen to incidentally time their investment with a short term rally can often see the value of their investments shoot up but then panic at the slightest downturn feeling that they stand to "lose" whatever momentum has occurred. The fact is, the investment was always a long term vision and both short term gains and short term losses are not that significant. The fundamental focus for the investment is asset ownership, and though value increases may be perceived after a short time frame, this often occurs on the same number of units - so cashing out at higher value also means that potential buybacks into the market are also done from a higher unit price.
Once you have taken into account any transactional costs, capital gains tax and time implications you can often find that you would have been better off leaving the money in the investment in the first place. Long term strategic vision is a far superior view than short term tactics.
I have discussions with people quite frequently who believe that the better strategy is to sell down when the market is rising... "wait for it to fall"... and then come back in and purchase at the lower unit price.While all good in theory, there are still costs that must be considered and effectively only a hunch on where the market is going to go thereafter! If the unit price rises from that point, you have created unnecessary havoc for no gain... if it falls from that cash out point... how low do you let it fall before re-entry?
The Australian All Ordinaries long term investment return (Capital growth and Dividend combined) is approximately 13.2% per annum. It is widely held throughout the financial planning industry that the majority of investors "average" return is approximately 6-8%... with such a large disparity between the two one must ask - what are the majority of investors doing to generate that result!!? The constant buying and selling based on emotion, instinct, "knowledge"...whatever the driver for that process is, the statistical evidence suggests that had they simply placed the funds and forgotten about them - and not attempted to jump in and out with the volatility they would have been significantly better off.
It seems like broken record material but it is so important to stress – do not allow emotion, whether euphoric or depressive to command your decision making. Maintain the steady course and as Rudyard Kipling aptly noted in "IF"... If you can keep your head when all about you are losing theirs, yours is the earth and everything in it.
