Monday, August 15th, 2011
When I was young, I used to go fishing with my father in his boat. Not being much of a sailor, I often succumbed to the motion of the waves when there was a big swell. All I wanted to do then was to get my feet back on firm ground. I still remember the advice my father gave me to help me last the distance back to land. He would tell me to focus my eyes on the distant horizon. By looking at a steady point far away, the ups and downs became tolerable and, after plenty of practice, I didn’t even notice the movement. Now, as an investor, I find I can use the same technique when markets become volatile. The horizon on which I must stay focussed is my ultimate investment goal and if there is no good reason to change it, then the short term ups and downs should make no difference to my investment strategy.
Markets move in cycles and as surely as the sun will rise every morning, markets that have dropped will rise again. The value of a diversified investment portfolio will move in waves that fluctuate within a band on either side of a long term trend line; never reaching either infinity or zero.
Share prices are driven by two major forces; market sentiment (fear and greed) and market fundamentals (economic and financial performance). Market fundamentals set the upper and lower limits of value, while market sentiment is the driving force between the upper and lower limits. When the market drops, it is time to look for bargains. There are opportunities to make long term gains by investing in markets and companies that have solid economic and financial prospects, and which will experience a rise in price when the market sentiment changes.
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