Are you more optimistic when the share market rises? Well, stop it

Check yourself before you wreck yourself: Stock expert reckons you should be happy when prices dip. Here's why.

good news and bad for asx shares represented by same man pictured happy and then sad

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A prominent stock commentator has warned of complacency setting in among retail investors after the spectacular post-COVID share market recovery.

Fidelity International investment director Tom Stevenson especially singled out unconditional optimism as a recipe for disaster.

"Are you becoming more optimistic as the market rises?" he asked in a column on Sharecafe.

"Watch this tendency because the best returns have been achieved by investors who adopt the opposite approach."

He referred to a former colleague who taught junior fund managers "to become more bullish as the market fell". 

"Easy to say and very difficult to do," said Stevenson.

"The growing appetite for risk-taking in obscure and volatile assets like cryptocurrencies suggests people are chasing growth. That's worrying."

Invest when you don't want to

Buying shares when everyone else is selling is the best way to nab returns.

But Stevenson acknowledges this is difficult, even for professionals.

"Are you an emotional investor? This is a silly question. Of course you are – you are a human being."

The way to remove the emotion out of buying is to do it "regularly and systematically", according to Stevenson.

"It makes you invest when you don't want to – invariably the best time to do so."

Have some cash in hand for volatile times

Aside from quarantining enough cash for day-to-day living and emergencies, Stevenson encouraged punters to set aside some capital during the good times. 

This is so you can buy up when bad times hit.

"If you were fully invested in March 2020 you would have enjoyed the subsequent recovery – but how much better if you could have added to your investments at bargain basement prices?" Stevenson said.

"Having some cash to hand (separate from what you've put aside to cover expenses) is essential if you are to benefit from Mr Market's mood swings."

How much can you stomach a downturn?

There are many first-time stock investors who are currently experiencing a downturn in their portfolio for the first time.

Stevenson reminded punters accepting the unavoidable share market downs goes hand-in-hand with enjoying the great highs.

But everyone has a different tolerance for volatility.

"You also need to be realistic about what you can, and cannot, live with," he said.

"How well do you know yourself? Twelve years into a bull market, it is tempting to think that we have a greater tolerance for risk than we actually do. You will find out what your real risk appetite is when your portfolio is worth 30% less than it is today."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on How to invest

Man pointing an upward line on a bar graph symbolising a rising share price.
How to invest

How to invest when the ASX hits a record high

Worried about buying at today's prices? Here's why you shouldn't be concerned.

Read more »

A man wearing glasses sits back in his desk chair with his hands behind his head staring smiling at his computer screens as the ASX share prices keep rising
How to invest

Lessons from a self-made ASX millionaire

Here's how he did it.

Read more »

A couple cheers as they sit on their lounge looking at their laptop and reading about the rising Redbubble share price
How to invest

$20,000 in savings? Here's how to target $1,000 of passive income each month

This could be the easiest way to build a meaningful passive income from the share market.

Read more »

Three happy office workers cheer as they read about good financial news on a laptop.
How to invest

The 3 rules new ASX share investors should always follow

These rules could help you generate wealth in the share market.

Read more »

Person holding Australian dollar notes, symbolising dividends.
How to invest

How to build a $1,500 monthly income stream with ASX dividend shares

It isn't as hard as you think to build a monthly income stream on the share market.

Read more »

A smiling woman sits in a cafe reading a story on her phone about Rio Tinto and drinking a coffee with a laptop open in front of her.
How to invest

How to start your ASX share portfolio with just $1,000

Investing doesn't need to be hard. Here's an easy way to start.

Read more »

Happy young woman saving money in a piggy bank.
How to invest

How I'd invest $250,000 in Australian dividend stocks to never worry about money again

Here are a number of stocks that could be top options for income investors with money to put into the…

Read more »

Warren Buffett
How to invest

5 easy steps to invest like Warren Buffett with ASX shares

It isn't as hard as you might think to invest like the Oracle of Omaha.

Read more »