I was recently reading an article about emotional investing and there were two key points that really caught my attention. The first was that the average investor had underperformed the market by four percent. The second was that, by simply following the world share index over the last 40 years, your initial investment would now be worth 45 times what you started with (including the dividends received during that time).

Along the way, we endured the stagflation and oil embargo crisis of the late 70’s, Black Monday in the 80’s, the Russian Rubble crisis, Tech Wreck, the 9/11 stock market crash and most recently the GFC. Assuming we stuck solid, at the end of all that we would have 45 times what we started with, plus regular income.

The average investor did not stick to the plan. Along the way each of these events saw investors panic and sell their shares. We all know we are supposed to buy low and sell high, however, each of these events saw people sell low. The fear of missing out also sees a number of investors jumping into the market when they see it rising. This results in buying high. The recent cryptocurrency surge is a classic example of this behaviour.

Four percent under performance may not seem like a big deal. The average investor over the same period would have about 18 times their initial investment.  That is a huge difference.

One thing I’m constantly reminding my clients is that shares directly relate to companies. In Australia, if you follow the index, your biggest holdings relate to companies like the big banks, Woolworths, Westfarmers and BHP.  If the Woolworths share price drops over the next 12 months, does that all of a sudden make Woolworths a bad company?  Of course not.

When the market falls and the share price of these big companies fall, if we think they are still good companies, we should be thinking about buying shares, buy low. Unfortunately, most of us, when confronted by a downturn, are far more likely to sell. Not many people were lining up to buy shares in the midst of the GFC.

The key to long-term success on the share market is to pick a strategy and stick to it. If you are a balanced investor, invest in assets in line with this and continue with your contributions irrespective of how the markets perform. Time in the market is far more reliable than trying to time the market.