Unfortunately, volatility has returned global equities with significant falls in October through to today. Sharp jolts like these can be frustrating (and financially destructive) even when we know that pullbacks are an inevitable but normal path of the long-term investment journey.
It’s also perfectly normal to feel anxious during selloffs, or uncomfortable as we wait and see if markets fall further. Unfortunately, we cannot change how we feel during periods of market volatility. However we can learn how to keep our emotions from affecting our investment decisions.
Behavioural finance is sometimes mistakenly seen as a vehicle for ridding investors of their pesky emotions and irrational quirks, en route to them becoming ‘a rational investor’ that economists long imagined them to be. If we could just rid ourselves of irrationality, the thought goes, we would make perfect financial decisions.
Ultimately though, we are all imperfect in some shape or form, so some ideas that may help us stay focused and avoid emotional biases;
- Avoid market “noise” – the media and specifically financial journalists will forever continue to create sensationalist and alarming headlines that stoke fears and distract from financial goals and objectives. Even in the era of fake news, we still seek a narrative to justify market movements, but we should ALWAYS have a healthy scepticism for news flow. Quite often, it is better to just ignore the headline in volatile markets.
- Empirically speaking, the concept of compounding (as part of globally diversified constructed portfolio) is by far the best way to create and grow wealth over time.
- Avoid making extreme changes to the portfolio – big market moves will have lasting repercussions, so only small changes should be made if necessary. By switching to cash, there is still the issue of capital being eroded by inflation. Sometimes inaction is the best course of action.
- Investment returns are in the behaviour-holder. This article by Greg Davies summarises this very well – Professional Adviser Article
The objective should be to keep focused on financial plans, maintain focus on specific goals (all time frames) and to rein in any short-term emotional reaction. At any stage of the financial planning cycle, making snap emotional mistakes can be very costly indeed.
Investment Portfolio Manager