Feel the fear and buy anyway

I was. But when it came, I was shocked at the severity and impact of the fall. I could see the opportunity but, looking back, I'm not sure I made the best of it.

It's not our investing skills that often fail us it's our investing psychology. A sense of fear prevents us from acting as we know we should.

Here is a dose of psychological fortitude to help you avoid mistakes and profit from the opportunities amid the latest turmoil.

Hold cash

While we've recommended our members increase cash holdings over the past 18 months in preparation for a time such as this, if you don't have spare cash you need to take tough decisions. Don't hold stocks just because you've had them for years when better opportunities exist. You need the ability to act quickly. Ensure your cash is available through your broking account at short notice.

Have a 'buy' list

This is a great technique to sideline emotions that can prevent you from acting. If you know what you want and at what price, when the time comes you'll be ready. As Intelligent Investor senior analyst James Greenhalgh says: "If you're fuzzy about what you want to buy, or what yield you're looking for, you're less likely to act. You need to train yourself to WANT price falls, which involves ... developing a watch list beforehand."

Plan, buy gradually

Again, this technique relies on committing to a course of action before emotion takes over. Do not pile in all at once. Another colleague, senior analyst Gareth Brown, says: "Buying gradually in fearful times and sticking to high-quality companies at prices cheap enough to offer a good margin of safety is a more realistic aim than trying to pick the bottom of a market fall."

Instead of the dollar-cost-averaging approach, US investing legend Jeremy Grantham recommends a few big bites: "A single, giant step at the low would be nice but without holding a signed contract from the devil, several big moves would be safer." Whatever your preferred approach, choose one and stick to it.

Stick to portfolio limits

There are 39 stocks on Intelligent Investor's buy list and there's every chance a few won't work out. That is the nature of investing. Portfolio limits ensure the damage these failures might do to a concentrated portfolio won't be fatal to a more diversified one. Concentrate on the many bargain blue-chip opportunities and diversify, paying attention to portfolio limits. You don't have to sacrifice quality for high potential returns.

Challenge your impulses

We're programmed to respond to fear because in the past it's been a successful way of not getting eaten. But in the share market, fear inhibits profitable, rational action. If we are to prevail, we should constantly reassert a few fundamental truths about investing that conflict with our typical reactions to uncertainty and rapid share price falls.

Firstly, if you want certainty, you'll have to pay for it. When everything's going well, you won't get anything cheap. Bargains are a product of a climate of fear.

If you want to buy cheap stocks, you have to feel the fear and buy anyway. Secondly, accept that prices may fall after you've bought in. You can't pick market bottoms or tops but if you're buying high-quality businesses cheaply, that shouldn't stop you buying more when prices fall further.

Finally, separate price falls from underlying business performance. The market can be irrational. To avoid getting caught by the herd, focus on business performance, not macro issues or media headlines. This is the major, long-term determinant of share price direction.

Nathan Bell is the research director at The Intelligent Investor, intelligentinvestor.com.au. This article contains general investment advice only (under AFSL 282288).