Investors have contributed to the volatility of equity markets by reacting nervously to index developments, a specialist has claimed.
In a five-page letter to investors, Peter Elston, chief investment officer for Seneca Investment Managers, claimed that investor overreactions to market movements had contributed to volatility.
Citing analysis of the S&P 500 index, he said there had been seven equity bear markets in the past 45 years but only one of these appeared to be driven by rational investor behaviour.
He said: “The only bear market that was remotely justified on the basis of what happened to dividends was the most recent one in 2008-9. All the others saw no corresponding decline in dividends.”
He added that equity investors tended to demand a high return because of equity market volatility, but said: “It is their own behaviour, not that of the underlying dividends, that causes the volatility.”
Steven Pyne, a partner at London-based Holden and Partners, said: “Investors sometimes try to be a bit too clever and can be too skittish in reacting to the markets; but we would advise them to hang in there. Investment is a long-term game.”