Unless you’ve been totally off the grid, then you’re aware of the continued volatility in the global markets. While the wild swings can be enough to put anyone on edge, I’m here to say (like a broken record), the best thing to do is sit tight and wait it out. Logically we all know this to be true, but the emotional side of our brains can sometimes goad us into making moves that are detrimental to the long-term performance of our portfolios.
If you are finding yourself worrying more than normal, then I really want you to take what I’m saying to heart. I am telling you as someone with 25 years experience in this business, the most powerful thing you can do as an investor with money in the market for many years to come, is block out the daily chaos and wean yourself off the need to compulsively check your portfolio every day, or even weekly.
If we look at the past 100 years, the S&P500 has (on average) returned approximately 10%, annually. As Tim Shufelt, Investment Reporter for The Globe & Mail pointed out in his June 10th article, “On any given day, the odds of the S&P500 being in positive territory is basically a coin flip, according to an analysis by Washington-based money management firm Fisher Investments… Calendar returns meanwhile, were positive 74 per cent of the time. And by the time the investment horizon increased to 16 years, the U.S. stock market had a positive result 100 per cent of the time.” Read that last sentence again!
In the world of “Behavioral Economics”, which I’ve studied, “Loss Aversion” (part of the Prospect Theory, put forth by psychologists Daniel Kahneman & Amos Tversky, winning them a Nobel Prize in 2002), implies that people are biased in their real estimation of the probability of events happening. It goes on to state that individuals tend to be loss-averse as they weight losses more heavily than comparable gains. Now, translate that to how you might feel when the market is up +3% one day, but falls by the same amount the following day. I suspect you feel the “loss” far more acutely than the gain.
These same two psychologists went on to analyze how loss aversion affected investor returns. Their findings concluded, “The investors who got the most frequent feedback [i.e. checking portfolio constantly], took the least risk and earned the least money.”
I can’t say this better myself, so I’ll end with Mr. Shufelt’s (Globe) final words, “…the market is a proven compounding machine. Given enough time, it always bounces back. But not for those who let their emotions get the best of them when the chips are down.”
If you’re reading this and you’re not a client, do contact me for a complimentary, professional opinion on your current portfolio.
Libby
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