Why do investors fail to take advantage of FTSE 100 crashes?

It’s no great secret that market crashes, like the recent coronavirus crisis, are opportunities for investors who have cash to deploy to pick up great bargains. This is because the biggest gains in the market tend to follow the biggest losses.

There are many studies that demonstrate that missing the 10 best market days over a long enough investing period will more than halve your returns. But if this is true, then why do so many investors struggle with building a good nest egg for their retirement portfolio? Here are the main reasons why.

FTSE 100 investors don’t stick to their ideas

As a captain on my old football team used to tell me: “It’s not easy, but it is simple”. This applies to investing as well as sport.

It’s not that it is hard to find a winning investment strategy – there is plenty of evidence that demonstrates that consistently buying a diversified portfolio of cheap, high cash flow companies, and then holding them for long periods of time is the best way to go. That’s the simple part. The part that is not easy is sticking to your simple strategies. 

One of the main reasons why so many investors fail to generate the returns that they want is boredom. Reading about companies with great potential and analysing and projecting out their futures is a pretty rewarding experience. Sitting around and waiting for the market to recognise the same things that you have seen is less so.

When we talk about holding stocks for long periods of time, we don’t mean weeks or months – we mean years. Sometimes doing nothing is much harder than doing something.

Investors try to do too much and lose focus

The other big reason why investors often find themselves underachieving in terms of the results they want is that they get distracted by the huge amount of choice available in today’s stock market.

Like a child in a sweet shop, they run from treat to treat, not able to focus on one specific thing. One day they might be interested in buying cheap energy stocks, the next they are looking at rapidly expanding technology companies, and the day after that they are looking for a safe dividend paying stock.

Now, while there is nothing wrong with diversification – as mentioned earlier, it is in fact very important – lack of focus is certainly a problem. Everything has an opportunity cost. The time you spend researching different strategies and sectors could be better spent becoming an expert in one particular area.

Warren Buffett often talks about his “circle of competence” – things he knows a lot about (like insurance) lie within this circle, and things that he does not know a lot about (like technology) lie outside. Figure out what your own circle looks like and focus on the things that you are already good at. You will find that this is a much better use of your time than running around the sweet shop.