After recent years, many investors still seem uncomfortable about the recovery in share prices and need constant, short-term reassurance. Perhaps it is a fear that it’s too good to last, or political uncertainty, or ever-present worries that central banks will close the taps on the flood of liquidity.

But whatever the case, it seems many SMSF investors need to keep finding long-term reasons to maintain confidence in share investments. They need mental strength to overlook much of the short-term market chatter (while watching for possible significant changes) and confidence in their investment beliefs to support their long-term approach.

The important strategy

Stockbrokers used to say the best time to buy shares was whenever you had the money. Today, investors need more than blind confidence; they need a framework or theory, which provides some guidance. For instance, growth investors want companies with growing profits; value investors want shares selling below their intrinsic value.

Now, however, there are many more theories about when and what to buy in the share market. This means investors have to filter out much of the “white noise” around the market, generated by traders talking their short-term trading book.

For every theory on the stock market, there can be a counter theory – and some widespread beliefs often are wrong. For instance, despite the instinctive appeal of the idea, share markets do not always track economic conditions and the correlation between growth in GDP and share prices isn’t clear cut.

Nor can consumer surveys provide an indicator of the market’s direction and extreme highs and lows in consumer (or investor) sentiment are probably one of the best contrary indicators for the share market.

In recent years, some traders have turned counter-cyclical, buying shares which are out of fashion. Anyone who wants to take this approach has the problem of separating sensible from faddish fashion. Then there is the temptation to join the daily or weekly share traders. Members who dabble in this, need to isolate their trading operations from the main portfolio and remember that constant tinkering with a portfolio can lead to additional costs.

Rather than chasing individual hot stocks, it may be more sensible to use the overall market sentiment as an early warning sign to top up shareholdings, when people are too bearish, and to reduce holdings when people become too bullish.

The Buffett mantra

There’s nothing new in this: Warren Buffett outlined it years ago, telling investors to buy when others are fearful and sell when others are greedy. Buffett also had his two golden rules: One, don’t lose money; two, don’t forget the first rule.

On stock selection, there’s a general tendency for amateur investors to select well-known names on the assumption that the big companies are big enough and ugly enough to look after themselves (and their investors). While size and reputation can work, Buffett also advises investors to seek companies with what he calls a “moat” to protect themselves from competition.

Finally, investors do need to consider the general economic and business climate – but by looking at available statistics rather than listening to chatter. For instance, despite some political talk, current consumer sentiment is more than 9% higher than a year ago.

The real worry, of course, is the big economic factors beyond the control of any politician or business leader. What happens with China’s economy and what the US decides to do with interest rates, are the two factors really driving the Australian and world markets.

Either or both these factors could turn nasty. So far, however, the optimists have profited and, despite periodical scares, China still seems a fair bet to continue its recent growth and the US Federal Reserve is unlikely to make any abrupt moves.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Also in the Switzer Super Report:

• Charlie Aitken: NAB and Suncorp – dog starts wagging the tail
• Paul Rickard: ASIC’s “crackdown” on hybrids – more noise?
• Ron Bewley: Still hopeful for Cochlear
• Penny Pryor: Buy, Sell, Hold – what the brokers say
• Tony Negline: When are my financial advice fees tax deductible?
• Questions of the Week: Pension payments and Liberal policy