After the market has fallen so heavily, many investors would understandably feel they must take decisive action to protect their portfolios from further damage. But such responses often cause more damage than good.
Depending upon their personal circumstances, of course, most investors shouldn't feel obliged to do much at all right now.
Jason Zweig takes up this theme in The Wall Street Journal this week, writing that any investor who has not been badly shaken by the severity of the bear market "has a few screws loose". That said, Zweig suggests that investors should try to direct their concern into sensible, non-dramatic actions that will improve their financial future.
"Instead of big impulsive steps you may regret later, you should take small and careful steps that will make you feel you have taken charge," he writes. "Mental health experts have found that merely believing you have some control over a painful situation is enough to make the pain more bearable.
"For investors, that means being deliberate in everything you do and making sure that your decisions are gradual and incremental, rather than sudden and drastic," he adds. "Move on tiptoe."
Zweig lists a few of what he calls "constructive steps". These include:
- Take an inventory of all your investment assets. This will show how your portfolio has coped with the downturn - it may not have suffered as much as you suspect. And by taking an inventory, you can check whether your super and non-super investments are appropriately diversified to reflect your tolerance to risk.
- Review your equity fund managers. Tax on capital gains, crystallised if changing fund managers, may have been erased or at least significantly reduced by the fall in share prices. He suggests that investors consider switching from high-charging managers to low-charging index funds - if appropriate for their circumstances. This way, investors will still be exposed to the market in order to benefit from a rebound.
- Think about using some cash holdings to pay off costly credit card debts. Many investors are now, of course, cashed-up.
His non-nonsense, sensible tips are highly appealing at this time of high drama in the market. Just because share prices have turned sharply downwards and the market is highly volatile, investors shouldn't feel obliged to respond in any forceful way. That's the central message.