Letting fear lead investment decisions can be costly
Fear is an incredibly powerful emotion. It causes us to do irrational things and, in the context of investing, there’s no shortage of people who will take advantage of this.
The Californian financial adviser and blogger Robert Seawright wrote an excellent article on this subject in 2018. “When the markets are roiling,” he wrote, “fear is pitched all day, every day, and human nature buys it. And pays a premium. A very big premium.”
“Fear makes money,” says Daniel Gardner in his book The Science of Fear. “The countless companies and consultants in the business of protecting the fearful from whatever they may fear know it only too well. The more fear, the better the sales.”
So, what’s the answer, apart from steering well clear of salespeople?
First things first: don’t feed the fear. When behavioral finance expert Greg Davies was invited on to Bloomberg to talk about the market rout in 2008, he was asked, live on air, what should investors do if they’re really worried. “They should stop watching Bloomberg for a start,” he replied. Apparently, they tend not to invite him now.
More importantly, investors need to have a plan. A plan that is ready for the inevitable unexpected market event. Mike Tyson likely said it best with “Everyone has a plan until they get punched in the face”. Understanding why markets decline and how to react is also useful.
The video published by Dimensional Fund Advisors, on how markets reward investors who stay disciplined at times such as these by Jake DeKinder says this:
“Recent events have increased the feeling of uncertainty and may have led some to question whether to not to make changes to their investment approach.
“It’s important to remember that while these events might seem frightening in the moment, they are not necessarily unique or unusual.
“Throughout history capital markets have rewarded investors who are able to stay disciplined. After many major events, financial markets have recovered and delivered positive returns.”
So what sorts of events is Jake referring to? Well, here’s a series of graphs showing how a balanced portfolio comprising 60% equities and 40% bonds fared in the one, three and five years following the last six major market downturns:
What these graphs show very clearly is that those who stayed invested while so many others didn’t were amply rewarded on each occasion.
Here’s Jake DeKinder again:
“Over the long term, investors who have been able to remain patient and tune out the short-term noise surrounding these events have been rewarded for doing so.
“In the face of uncertainty, it’s important to remember this historical perspective, and focus on the things we can control, rather than the things we can’t.”
If you’re in any doubt about what you should be doing, seek the help of a fiduciary registered investment adviser.
Otherwise, take Jake DeKinder’s advice; tune out the noise, think long term and disregard anything that’s out of your control. Most of all, fear not. Christmas is expensive enough without making irrational decisions with your investments.