"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one." – Charles Mackay.  

It’s a cliché, but equity markets can be a rollercoaster ride.  

One day everything is looking fine, then things can turn nasty, and back again, as investors react to the slightest bit of news, stocks rise or fall based on almost insignificant information, and the markets generally continue being predictably unpredictable.  

Markets fluctuate between overvaluation and undervaluation like a pendulum on an old clock, depending on whether the herd of investors is feeling optimistic or pessimistic.  

Yet, those swings do not happen like clockwork and an inordinate amount of time is wasted attempting to predict such things.  

In the 19th Century, Scottish journalist Charles Mackay described this kind of behaviour as the “madness of crowds”, in a series of books looking at various economic bubbles, erroneous beliefs, and other “popular delusions”.  

His writings pioneered crowd psychology and have been a bit of a predictor of what can happen – for example, US investor Bernard Baruch apparently learned enough from Mackay’s writings to sell all of his stocks before the Wall Street Crash in 1929.  

While the market may not crash anytime soon, it's important to keep your head when investing, make sensible decisions, and not get swept up in the latest fad or panic.  

And what would a comment on equity markets be without a quote from Warren Buffet? 'Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.'
 

There will always be a bear

As the old saying goes, “what goes up must come down”. There will always be market pullback, because bull markets don’t last forever.  

Growth can continue, but it’s never a smooth path – since 1928, the S&P 500 Index in the US (a key barometer of large US stocks) has declined 10% or more from a recent high more than 90 times, with just a handful of years not recording a 10% dip, according to ASA analysis.

So, while on average the Australian equities market has increased at 8-9% over the past 20 years, it has not been without the occasional shock.  

In volatile times you may feel that your portfolio is shrinking, but history shows that markets tend to recover.  

The key is to focus on the destination, not the road. Don’t sell your shares immediately just because a company has had a bad day - block out the “market noise” and stick to your financial plan.  

Don’t jump into a new stock just because the crowds are promoting it, don’t sell an existing stock just because the crowds dismiss it.  

Stay rational. Make your own decisions.  
 

Don’t panic!

Remember that a loss is only on paper unless you crystallise it.

Just because markets are volatile, it doesn’t mean that you must sell out.  

For most of us who aren’t speculators, shares should be treated as a longer-term asset – at least three years and probably longer, in ASA’s view.

Even if you need to convert to cash at a particular time, you can still pick your moment – some dips are brief, some last longer, but all of them end. 
 

Have an investment plan

It is important to have a flexible investment plan that recognises that markets change and that you, as the investor, will go through different life stages. 

For example, should you anchor your investing decision-making to an old price and ignore new information, or do you factor in the latest results?  

Some investors hold on too long, hoping that the share price will recover, rather than selling at a loss and investing in another company that will deliver dividends or growth. Others may sell too soon.  

Sometimes it is harder to do nothing than to make a quick decision based on market conditions.  But then, “act in haste, repent at leisure”.  

Occasional losses are part of life, and your investment plan should recognise this. For example, my plan is to buy and hold good companies, with strong management teams, that have a good strategy and could perform well in the long term. 

I am not trying for a quick win but am looking for share price growth and a dividend reinvestment plan that will build the size of my portfolio over the longer term.  

Others may choose to have a higher risk strategy, but this leaves them more susceptible to the whims of the market. This may mean having additional rules for investing that recognise the potential for loss – such as greater diversification and stricter limits on how much of your portfolio is exposed to the risky investments.

If your plan is to retire at a certain age, you might need to adapt in volatile times, rather than just selling at a predetermined point.  But your plan will help to guide you, because you should know what risk you’re willing to accept and how you will deal with it.  
 

Invest regularly

Sometimes it’s better to invest money periodically, rather than buying up big all at once.  

If you have some cash set aside, you’re in a better position to take up stock in a new company or to consider investing when others are spooked by the market and prices are lower.  

Remembering it’s not the timing of the market, it’s the time in the market that counts, that will help you to avoid making rash decisions in volatile times and to gain from the power of compounding returns.  
 

Don’t forget tax, and get advice

Consider your tax implications when selling shares, and make sure you’ve set aside money to pay for any capital gains tax (CGT) obligations.  

Consider matching the sale of loss-making stocks with purchases of profitable shares to generate the amount of cash required for whatever the cash is earmarked for.  

Getting financial advice before you make big investment decisions may help you reach your goals and taxation advice may help protect you unexpected tax bills.

But make sure your financial planner or accountant is qualified and do your own research too – it’s your money, not theirs.  
 

Inform yourself

Sometimes it helps to be part of a larger group.  Fellow investors can give you tips on what to do and how to avoid the traps (investments strategies, not stock tips).  

If you currently feel unconnected (within investing), consider joining the Australian Shareholders’ Association and its more than 6,000 members?  

Our education events and member groups can expose you to new ideas and different investment vehicles, informed by some of the leaders of the investment sector.  

The ASA is here to support and represent retail investors, and would love to welcome you into its community.