A Matter of Perspective
How often do you check the prices of your stocks and other investments?
We sincerely hope that it is once a year or even less frequently. Unfortunately there are many investors who log in regularly (some even daily) to check whether they have made or lost money.
Research by Nobel laureate Richard Thaler on myopic loss aversion showed that investors who checked their stock investments more often, perceived investing to be very risky. In addition, even investors who claimed they had a very long-term view of 20 to 30 years for their investments, still checked on their investments at least once a year. As a result, these investors tend to be more risk averse and allocated their investments as if they only had a 1 year timeframe to invest — at great opportunity cost of not allowing their money to grow and compound at an optimal rate.
With vast leaps and improvement in technology, we are now able to receive frequent updates of the price movements of our investments. These frequent updates are both a blessing and a curse — especially when it triggers our behavioural biases. For example, during the last big bear market in 2008, the performance of stocks (represented by S&P500) experienced sharp losses (see chart below).
The performance during this period was a stomach churning -38%. That means $1M would have become $620K in a short span of time. With the constant bombardment of negative news, causing fear and coupled with the propensity to frequently check on investments during this period, it was completely understandable for investors to bail out on their investing strategy and sell out at the worst possible time.
However, on hindsight and with the broader perspective, this terrible period when zoomed out over the longer term becomes a very different picture (see chart below).
The total performance (including the -38% collapse) when stretched over a longer period was an astounding gross return of 400%.
The large negative drawdown experienced in 2008 was just a blip.
There are many reasons as to why markets go up in the long run:
Constant human innovation
Growth of the revenue of the companies participating in capital markets
Time value of money
(Just to name a few)
However in the absence of this broad understanding, coupled with behavioural biases, investors are prone to react only in the short-term.
An investment adviser that is able to keep you seated through tough market cycles will be invaluable to your long term investment returns — that is of course, provided you are invested in the right assets. Whatever stress or worries the market is going through, such as our current predicament in 2022, would soon be a small blip in history. We have to look at the long-term instead.
If you are worried about your current investing strategy, would like impartial advice, or have the questions like:
Is now the right time to sell and buy back to the market when things are clearer?
Do I have to make changes to my investing strategy?
What is the best way to invest in the current climate?
What am I to do if a recession is coming?
In view of the unique market conditions we are in, we have specially dedicated a team to address such concerns. Click here to schedule a 30-minute pre-discovery session where we can have a chat with you to better understand your needs and concerns.