How can you stay calm when the market is crashing? This is a question that I was asked last March when the markets first declined in their reaction to the global pandemic.
Two emotions drive poor investment results if not controlled through a disciplined investment plan. These two emotions are fear and greed.
Most of us have heard the terms, “buy low and sell high” but why is that key principle difficult to implement during times of significant market volatility? Let us take a look:
This chart is from JP Morgan and it gives us all the average returns of various asset classes from 1999 – 2018. One would ask, “why would the average investor, who is invested in all of these asset classes have the worst performance?”
The answer is because they gave into fear and greed. The average investor sells when there is a market downturn and buys more of what has significantly risen. Let us use 2020 as an example. In March of 2020, when COVID was in its infancy and the investors were worried, the market declined significantly in a short time period of approximately 3 weeks. For many people, their gut may have told them “this isn’t good, lets sell some equities and wait this out.” IF an investor succumbed to their fears, they missed out on a tremendous recovery.
In contrast, successful long-term investors do the opposite of selling. When stocks decline, we believe that you should be rebalancing INTO equities by taking cash or bonds and purchasing stocks if your risk tolerance permits it. Historically, periods of decline have been followed by above-average market returns, and when it makes sense for you, you want to participate!
Let us fast forward to the fall of 2020 after the market significantly recovered. In some cases, emotions turned from fear to greed. It wasn’t uncommon to hear, “I want more of these tech stocks that are doing amazing.” Again, the contrarian approach would be to harvest profits in equities and lock in those gains – rebalance back to agreed-upon targets.
We, at Moneta, believe that investment success can be found when you have a supportive team to guide you through difficult markets and implement a disciplined long-term investment plan. Part of our role is to help clients avoid the fear and greed emotions that lead to destructive behavior and poor investment results.
If you have more financial questions, don’t hesitate to ask your Family CFO. We do more so you can too.
Disclosure: The opinions voiced in this material are for general information only and are not intended to provide specific advice for any individual. Examples contained herein are for illustrative purposes only based on generic assumptions. Trademarks and copyrights of graphics utilized herein are the property of their respective owners. This is not an offer to buy or sell securities, nor does it represent a specific recommendation. Please speak with a qualified tax, legal or investment professional before making any changes to your personal situation.
