This article may be of interest. For me it illustrates the folly of investors reacting to short term price movements. I believe the evidence shows that those with a longer term perspective make higher gains overall with day traders typically have the worst outcomes. You both use the weekly chart in most of your commentaries - very wise - and I use monthly charts when deciding on long term trends. With the dominance now of robotic trading and associated flash crashes I think it becomes ever more important to ignore short term price movements and base ones decisions on a carefully tested long term investing strategy. What are your views on this?

Eoin Treacy's view

Thank you for making these important points. Any long-term investment portfolio benefits from an attractive entry point and the ability to ride out occasional bouts of volatility for as long as the theme remains in a primary uptrend. In short then if you are unleveraged and have the stomach to sit out medium-term periods of consolidation I agree occasional bouts of volatility represent buying opportunities rather than times to panic.

This topical report from GMO discussing the effect of sequence risk on a portfolio’s long-term potential is important for investors to consider. Sustaining a major drawdown even within a long-term investment horizon is a hurdle to achieving one’s long-term objectives particularly if it happens early in the accumulation phase.

As a result it is worth considering what one’s exit strategy for a medium-term position would be. After all, every trend eventually ends and avoiding a “once in a decade drawdown” can be enormously beneficial to long-term results.

I agree that rationally the worst time to panic is when volatility spikes higher and the emotional pressure to sell is most acute. It is for this reason the subscriber in the above email is discussing an out-of-the-money order strategy. By the same token, the best time to harvest some profits is when prices are surging higher and a steep overextension relative to the trend mean is evident.  

Sharp reactions represent buying opportunities in the sectors you might wish to invest in but we also have to be diligent in identifying Type-1, 2 or 3 topping activity. Last week’s massive reaction against the prevailing uptrend has Type-2 top formation characteristics. A period of support building will be required to help repair the damage already done to confidence.