Investor Behavior in Times of Uncertainty and Stress
Overcoming Market Fear with Discipline
Investor behavior can be the most important factor in the success or failure of your investments to help you reach your financial goals. Warren Buffet has been quoted as saying, “We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”
Most of you probably reacted to the sudden downturn in the investment markets by thinking, “Sell! Get me out!” But if you have a solid financial plan in place, selling in the teeth of a declining market is a move based on fear not planning.
- Why get out? What is the purpose of the decision other than a reaction to fear? Has your advisor counseled you to sell?
- Why get out now? Why not last week or next week? What is so crucial about making the sell decision now?
- Do you need the cash from the investments? Selling in a crisis guarantees losses.
The chart above from BlackRock illustrates the effects of selling in a crisis.
- Market timing is a loser’s game. As the chart above shows, taking action or “trying to fix” your investment portfolio often leads investors to try to time the market. However, missing just 5 of the best performing days over the last 20 years (out of 7305 total days, 0.068% of those – less than a tenth of a percent) could have cost your portfolio more than $100,000 – nearly a third of its potential value. And if you were unfortunate enough to miss the 25 best days, you’d have less money than you started with.
- A reality to consider is that 24 out of the 25 best days in the market came within one month of one of the 25 worst days in the market. If you overreact to any one bad day, you could miss out. We have just experienced that movement in the past month. The Dow suffered its worst down day ever – a drop of 2,999.10 points or 12.93% - on March 16, 2020 and its best day ever – a rise of 2,112.98 points or 11.37% - on March 24, 2020.
- The story here is: Don’t let your fear of loss drive your investment decisions. Since we can’t predict when the best days will be, staying invested is often the best strategy. It’s all about time in the market, not about timing the market.
- Nobel Laureate, psychologist and economist Daniel Kahneman said, “Financial advising is a prescriptive activity whose main objective should be to guide investors to make decisions that serve their best interest.”
Perhaps it’s time to reevaluate why you are invested in the first place. Did you not have a set of goals and time frames? Did your advisor not discuss your ability to handle risk, a.k.a. volatility?
- Many people think of advisors as “money managers,” people who can make your money work as well as possible. While that’s accurate, it’s just as important that they act as an intermediary, a stop gap, between you and your investments. In reality, an advisor’s primary job is to guide you through the wealth-building process by helping you avoid common mistakes; to advise.
- Your advisor would next discuss how to structure your investments to manage those fearful times. Experts typically suggest that when you’re trying to break a bad habit, it’s extremely helpful to tell someone else so they will hold you accountable. They can keep you disciplined and on-schedule when you may feel like deviating. When it comes to investing, the perfect person for that job is a financial advisor.
In these unsettling times, reviewing your plan and your goals with your financial advisor will enable you to stay disciplined and less fearful. Contact us to discuss your investments and your plan.