The markets are difficult to pick

The financial markets are notoriously difficult to predict in the short term. One of the reasons for this is that they often react irrationally to world events sending the market shooting either up or down based almost purely on emotion.

Over the last 12 months we have had some huge world events, many of which were unexpected; President Trump, Brexit and the atrocities in Syria headline an interesting year.

Although 2016 was more eventful than most, history has shown that we can expect the unexpected, and there will, in most likelihood, be a number of significant events in 2017 as well.

With events such as these, we usually see the market move dramatically. Sometimes it crashes, other times it surges.  Either way, market volatility increases around these events.

If we take emotion out of the process, it is clear that the market has over-reacted in a lot of circumstances.

When Brexit occurred, initially we saw the Australian markets fall dramatically, about 3% from memory.  A week or so later the markets returned to roughly where they were prior to the referendum.

We should look at shares as what they are; an investment in the underlying company and assess the effect of the event on that company. For example, is the Commonwealth Bank immediately worth 3% less because of the Brexit vote? Probably not.

The fact that the markets returned to their previous position so quickly confirms that the initial sell off was an emotion based reaction.  This means that investors who sold their shares or managed funds (possibly by switching to a safer option) at that time have, in effect, sold for 3% less than they could have received a week either side of when they sold. If they buy back into the market once things have cooled down, they have turned what would have been a paper neutral position into a cash flow loss.

The key to successful investing in the share market is to buy a diversified portfolio of quality shares based on their long-term ability to turn a profit and ignore the peaks and troughs along the way.  It is essential to stick to your long-term strategy.  Focusing only on the troughs is likely to lead you to make a decision that is going to hurt your long-term performance.