Following the herd can be detrimental for returns

JPMorgan Asset Management (JPMAM) has warned that investors with a ‘follow the crowd’ attitude toward investing could be missing out on better returns over the long-term.

The investment house believes that investor behaviour is largely driven by sentiment. When markets are strong and share prices are high, flows into equity funds also tend to rise. But when markets are low and share prices offer better value, fund flows are often weak. Therefore, many investments are made at the top of the market, while investors frequently miss out on the opportunity to invest when share prices are low.

As has been well documented over the last few weeks, the result can be damaging for long-term returns. Over the last six years, for example, fund flows into UK equity funds have closely followed the UK stock market.

It would seem that buying when others are selling and holding onto your equity holdings for the long term is the best strategy. As Warren Buffet puts it, ‘profit from folly rather than participate in it.’ Too many investors are too quick to sell when markets turn down, missing out on the subsequent rebounds in the market. Investors with the ability to resist the urge to sell on the first signs of turbulence and ride out market volatility will reap the rewards in the end.

In periods of volatility, it is natural for investors to be concerned about the value of their investments. However, it is important to remember that equity investing is for the long term. Over the past 25 years, equity markets have weathered fluctuating conditions to significantly outperform bonds and building society deposits. Equities do carry a higher level of risk than bonds and cash, and investors can expect greater levels of volatility. But as part of a well-diversified portfolio, they have historically proved the best way to grow capital and protect it from inflation.

Mike Parsons, Head of UK Distributor Sales at JPMorgan Asset Management commented, “Our message to investors is not to sell in a market downturn. This will only serve to crystallise losses. There is no need to risk the timing of markets; it’s enough to be in markets as the long-term performance of equities has historically proven. We fully appreciate that investors can become concerned when markets fall but we would urge them to take the long-term view with a well balanced, diversified portfolio.”