In this episode, leading business journalist Ruth Sunderland sits down with Continuum’s Managing Partner, Martin Brown, to dissect how global shocks impact investor psychology. Together, they explore the real cost of emotional decision-making, the illusion of timing the stock market, and why consistent time in the market remains the ultimate anchor for long-term wealth.
The Iran conflict has thrown stock markets into turmoil but Continuum’s Martin Brown tells Ruth Sunderland the worst thing investors can do is rush to sell. Martin says emotional decisions can take a heavy toll on a portfolio – and this is where a financial adviser should really prove their value.
Q: Martin, stock markets around the world have been very volatile and this can be worrying for private investors. What do you make of it all?
A: I feel I am stuck in a time warp. There have been a series of events over the years – the pandemic, Black Monday, the dot com boom and bust. The key thing is to stay calm and to remember these episodes can be relatively short-lived. History tells us that markets bounce back. There is no need to panic if the core of investments in your portfolio is fundamentally strong.
“It is an old saying but it is true: time in the market is more important than timing the market. Shares are a long-term investment – at least a five-year horizon.”
Martin Brown
The true financial cost of panic selling
Q: There is quite a body of research now on how emotional decision-making can seriously damage your wealth. I was struck by the finding from Oxford Risk called ‘The Cost of Being Human’, which showed that investors forgo up to 3 per cent a year in returns because of short-term emotional decisions – basically, they bought high and sold low. Do you think investors are aware of just how much emotional reactions can cost them?
A: I’d like to think a lot of people are aware of what a big negative difference a panic decision can make because their adviser will have prepared them for these scenarios. If I go back to the last serious episode, during Covid, we only had three clients out of 18,000 who disinvested. One was to do with a bereavement and the other two just did not feel comfortable.
Q: I’m fascinated by ‘the behaviour gap’ – the difference between the returns an investment could generate in theory, and those that investors actually make. Research by Morningstar suggests the gap – which is caused by emotional decision-making, could amount to 15pc lower returns over ten years. How important is an understanding of psychology for an adviser?
A: Our people don’t have to have a PhD in behavioural psychology but the essence of a good adviser is very much psychology-led. They get inside a client’s mind. If people are in a state of panic their brain is in fight or flight mode and they may not be very receptive to facts or rationality. But good advisers should have laid the groundwork from the beginning. In the course of investing for a long period, shocks and volatility are inevitable. A good adviser will have explained these things and will be communicating with clients, which should be reassuring and keep any panic at bay.
Why investor psychology beats portfolio construction
Q: Is investor psychology just as important as portfolio construction?
A: The portfolio is important but behavioural psychology has more of an impact and I will tell you why. It might be the best portfolio on the market, performing with double digit returns, but if the investor hasn’t got realistic expectations, the minute it drops they will be looking to disinvest because they are panicking.
Q: So are we saying there is no portfolio so brilliant it could not be defeated by bad psychology?
A: Yes, yes, absolutely.
Why you shouldn’t try to time the market
Q: There is a lot of talk about ‘timing the market.’ Yet the data shows that if investors had missed the best 20 days in the past 25 years on the S&P 500 they would be significantly worse off. And the best days tend to be close to the worst days – this was the case in the financial crisis, in Covid and more recently with Trump’s liberation day tariff. In other words, markets bounce back. So is it pointless to try to time the market?
A: Yes. It is an old saying but it is true: time in the market is more important than timing the market. Shares are a long-term investment – at least a five-year horizon. Far more significant than when you invest is how long you stay invested. The key thing is to invest as soon as you can afford it. Advisers offer a no-obligation free initial consultation, and I am amazed more people don’t take up that offer. You don’t want to be saying: ‘If only I had invested in shares’ or ‘if only I had kept my money in shares when markets fell.’ At times of volatility like these, look at the fundamentals of the shares you are invested in – strong, rooted, profitable companies. What has really changed is emotions, not the fundamentals.
“It might be the best portfolio on the market, performing with double digit returns, but if the investor hasn’t got realistic expectations, the minute it drops they will be looking to disinvest because they are panicking.”
Martin Brown
Q: Keep calm and carry on?
A: Yes – and I shouldn’t say this to a journalist but maybe don’t watch continuous TV news!
Key takeaways: The power of time in the market
- The human cost: Short-term emotional choices can cause investors to forgo up to 3% a year in returns by buying at market peaks and selling during sudden dips.
- Psychology over product: Even the most brilliantly constructed investment portfolio can be defeated if an investor acts on short-term panic rather than long-term strategy.
- Stay the course: Trying to time volatile market movements is historically counterproductive; true financial security is built on consistent time in the market.
