Nerves of Steel
Even the intelligent investor is likely to need considerable will power to keep from following the crowd.
Most investors will never complain when volatility pushes the prices of their investments upwards. After all, we all like to make some money. When your investments go down however, is when your nerves get put to the test. You may suddenly experience anxiety and thoughts like ‘how much will I lose?’, ‘did I make the wrong decision?’, ‘I should have waited a little longer!’, or ‘I could have left my money in the bank.’
Whenever such a situation arises, it helps to remember one of the basic principles of investing: Risk and uncertainty are inevitable in order to receive a return.
The diagram below shows the best and worst case scenarios when investing in a diversified global stock portfolio (in SGD) over the past 50+ years. You can see that over a shorter time period, the losses can be monumental (as the gains can be). During the 2008 Global Financial Crisis, in the worst case scenario, you could experience a one year loss of more than -40%.
These type of losses can be staggering. Just imagine, $1 million dollars in your investments shrinking to $590k in 12 months. Many people would lose many a night of sleep. On hindsight, it is easy to say that you would buy-in when markets collapse to such a level — but even with the recent COVID-19 selloff in March 2020, when we urged friends and investors not to panic and use this excellent opportunity to add more into the market, only a handful managed to remain calm and do so. It is extremely difficult to act during moments of peak pessimism, when the news is blaring out negative headlines hour after hour.
However, stocks are one of the few key asset classes you want to be invested in should you wish to beat inflation in the long run. As such, every portfolio should have some amount of stocks — this ensures that you receive returns that outpaces the reduction in spending power due to inflation in the long-term. With the possibility of growth and returns, come risk and volatility. If you are not sure how much of your investments should be allocated to stocks, here is a simple unscientific emotional guide on how much you should allocate.
In addition, here are some lessons from the stock market that we should always keep in mind:
Even though your asset holdings can be comprehensively and broadly diversified, you can’t diversify away all risk — such as unsystematic risk, or the inherent risk that comes with investing in the market. You may still experience large losses; stocks will never march upwards in an uninterrupted fashion.
You have think for the long-term. The definition of long-term? This was elucidated in the first diagram — the worst return for a 15 year holding period is positive. For any other shorter time frame, you may still experience a negative outcome.
Investing in individual stocks means exposing yourself to additional systematic risk (risk associated with the individual company) in addition to unsystematic or market risk. When the economy is faltering and uncertainties are rising, you have to assess the value of the company you are holding during the tumultuous period, and you have to do so when their stock price is falling through the roof.
Life is hard enough and stressful as it is, and there is a myriad of worries that may pop up in the day to day — the stress of investing doesn’t have to be one of them. Nerves of steel are needed in investing so you can stay the course for the long term. However, the journey is made easier when you have someone to walk beside you. Should you feel you’d like some company or guidance, GYC can help you every step of the way.
