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TRIGGER HAPPY

While a common impulse is to act quickly when volatility hits portfolios, the evidence shows it is better to keep calm before responding

Contrarian Investment strategies

We are currently investing in an extremely noisy political and economic environment. While markets have remained subdued recently, it is inevitable that greater volatility will emerge. When this happens, how should we respond?

As investors, our natural impulse when faced with bad news or growing uncertainty is to react. Instinct tells us to protect portfolios or to profit from a particular outcome. This deeply ingrained, fight or flight response is a real challenge.

There is plenty of research on this topic.

A study by Brad Barber and Terrance Odean shows a clear link between portfolio turnover and the results generated by individual investors. Those portfolios in the highest quintile of turnover delivered returns more than a third lower than those in the lowest quintile of turnover. Put simply, the impulse towards action is not beneficial to returns.

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