During weeks like the one just finishing, or indeed the majority of 2016, industry mayhem remains so scary that many investors might not check into their online statements.
Rather, many get to be the proverbial ostrich featuring its head inside the sand. If you cannot begin to see the enemy, perhaps he isn’t really there?
This “ostrich” truth is actually discussed inside the financial industry: look at this blog from Barclays: “The ostrich effect describes an investor’s tendency to cope with risky economic situations by pretending that they do not exist.”
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At this point you ask , whether such behaviour is really helpful, or the reverse. I’m inclined to consider that average investors half way through their investing lives may not do too badly while using the ostrich approach, provided their portfolio had been well diversified and well suited for the danger profile they presumably chose to before assembling the different of the portfolio.
Norm Rothery, publisher of Stingy Investor, says investors are the most useful off taking a Rip Van Winkle-like break from carrying out a industry for quite a long time. But, he adds, “the hue and cry that surround bear markets causes it to be extremely difficult to prevent going for a the least a peek. It’s how panic spreads just like a contagion. To guard against it take two deep breaths, save a bit more, and adhere to your long-term plan. “
If you pulled the face out of the sand mid-day Thursday, when the Dow Jones was down greater than 400 points, a trader glued to BBN or CNBC may have fell for panic, fearing much more losses. In the end, last August industry was down a thousand points immediately.
In this case, the do-nothing approach might have prevailed, because the market came roughly half how back. But to help keep such equanimity while stock screens come in the red, and television pundits are screaming words like “plunge” and “plummet” is a lot harder to tug in case your portfolio is unbalanced.
If you’re 100% in aggressive growth stocks or the “FANG” tech stocks (Facebook, Amazon, Netflix, Google) that got hammered yesteryear week, it’s a lot harder to carry on than should you offer large cash and bond positions, gold or possibly hedges in position that rise when stocks fall.
Personally, I own all the FANG stocks consider they are simply one small part of our overall portfolio, I do not be worried about it. Whatever they lost consists with gains in gold now, the whole concept of maintaining a well-balanced portfolio. You realize in advance that doesn’t everything rises within the given environment, and hopefully not everything falls. Everything you worry about is the performance in the overall portfolio, hopefully with some winners to cancel out the losers.
But so what can financial professionals see inside the behaviour of their clients?
Steve Lowrie of Toronto-based Lowrie Financial agrees some clients look less in down markets but says “a small minority would actually look more.” Lowrie finds down markets have a tendency to enhance certain negative behavioural biases in clients, for example anchoring and start-date bias, that they blogged about within December.
Aman Raina is definitely an investment coach with Sage Investors along with a keen student of behavioural finance, and that he too blogs extensively concerning this. “Yes there is a certain natural fear factor (i.e. peeking for their statements with one eye opened) over these times,” Raina observes. But he adds the ironic understand that “during points in the market weakness or where people’s personal finances they are under stress, people actually become more motivated being financially literate to know why they’re within the situation they’re in and therefore are more motivated to carry out rectifying the problem.”
By using this, Raina concludes when clients create a lot of hurt because of extensive losses inside the stock exchange, it’s “actually more conducive to improving financial literacy. No formal program available can provide that kind of motivation.”
Jonathan Chevreau founded the Financial Independence Hub and is reached at jonathan@findependencehub.com.
