Avoiding the Herd… The Importance of Sticking to a Financial Plan in Times of Uncertainty

It can be tempting to take investment tips from friends or try and DIY your investment portfolio with the help of the financial columns. In fact, investors do this time and time again – we’re human beings and we’re hard wired to follow certain psychological urges. One of these is to follow the herd – we’re socially driven creatures and so tend to be attracted to things that are popular, preferring to ‘fit in’ rather than stand out from the crowd. This is especially true in times of uncertainty…why would you deliberately do something different to what those around you are doing?

Here are 3 reasons why you should stick to your own plan rather than following the herd…

  1. You risk impacting other areas of your plan

Any investment decisions you make have the potential to impact the rest of your financial plan. If you lose money on an investment, this will impact the amount of money you can put towards other parts of a financial plan, or may detract away from the pots that you had earmarked for other things. Your plan has been developed for your own circumstances, meaning the financial choices made by other people may not be suitable for you.

 

  1. You’ll pay a price for popularity

The very nature of something being popular is that it’s unlikely to be cheap. This is never more true than in the world of investments, where the rules of supply and demand apply directly – the more popular something is, the higher the price you will pay. By buying into something at the same time as everyone else, you’ll pay a premium price, you will limit any gains that might be realised, and you may buy in at the peak, meaning the only way is down.

 

  1. You’re unlikely to be able to time the market

In times of uncertainty, it is often a temptation to stick with the so-called ‘safe haven’ of cash. This can lead to investors wanting to withdraw from the markets and hold the cash, or else stop regular or one-off contributions into pensions or ISAs. Whilst holding in cash may seem like the sensible option, there is always a risk that you will end up paying more to re-enter the markets than the price you exited at. This is especially true in economic downturns as you will most likely disinvest on a downward trend and look to re-invest when things improve and are on an upward trajectory.

Being disciplined and following a financial plan certainly isn’t easy. It often requires sacrifices and can sometimes feel like you are going against the grain. But research shows time and time again that staying invested over the long term rather than attempting to make short term gains by withdrawing and re-entering investments delivers greater returns over the course of an investment.

Of course circumstances change, and financial plans need to be reviewed at least annually to ensure they are still suitable. If it’s time for a review of your portfolio or the uncertainty of covid-19 has led you to think you should have a robust financial plan in place, please contact us to speak to one of our independent Chartered financial planners.

 

NB. The value of investments can fall as well as rise. You might not get back what you invest.

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