I’d like to again welcome back John Hulton. John claims to not be a financial guru, stockbroker or financial journalist, but just an average bloke who has managed to find a way through the minefields of personal finance and develop a system that works for him and, which could be helpful for other people. He has already retired from full time work which puts him at the end game of what this Site is about – Save Hard, Invest Wisely, Retire Early. So while John is not a financial expert his approach has given him what many of us are chasing. I hope you again enjoy his thoughts.
The FTSE 100 got off to a flying start in 2013, the best January rise since 1989! The markets rose above 6,300, a price last seen prior to the start of the sovereign debt crisis in 2008.
How long this surge will continue nobody can know. Is it a temporary spike or is it a sign that the economies around the world are starting to see signs of real recovery? There will be much speculation in the media and on the discussion boards.
At one time, earlier in my investing career, I would probably have been thinking about selling some of the shares which had risen strongly. I would be trying to second-guess the market - there is no justification for this rise - all the problems of systemic debt in the major industrialised countries have not suddenly disappeared - the markets will soon fall back towards 5,000 and I will keep my powder dry and pick up a few bargains later in the year.
I say ‘at one time’ but I’m sure there’s still a bit of me that thinks the same way now. However, the emotional factors which underlie that process are basically twofold - fear and greed. Fear the markets may suddenly swing down as quickly as they have risen and I will lose all the double digit gains on my portfolio - and the greed of selling high and buying low during the next downturn. These two bedfellows are always present but need to be understood and neutralised if you wish to invest for the long term.
After many years as a private investor, I am gradually learning to regard these market swings and share price fluctuations with an attitude of mildly detached interest. I really don’t get over-excited when markets rise and equally, I don’t become wracked with fear when markets are falling. As an income investor, it will probably suit me when markets are in decline as it will throw up many more opportunities for a decent yield.
On a day to day basis, most investors will probably be following share prices because this is where all the action is. Profits are made on the markets by buying at a low price and selling at a high price, right? Wrong! Over the longer term, up to 90% of the total return on your portfolio will be derived from dividends - growth of dividends and especially the reinvesting of dividends.
