Improving Investor Behavior – Fear: Acknowledged and Avoided
It’s that time of year again when pumpkins start appearing on porches and horror movies are on TV. Halloween is when we indulge in our fear each year. We welcome it into our homes, knowing the temporary fright is sure to pass and make way for turkey and family get-togethers. The human psyche is strange, isn’t it? We run from fear and avoid it most of the year, yet we seek it out on Halloween.
This year, though, feels a little different. For many, the fear is more than ghosts and ghouls, but the far more realistic fears are of viruses and politicians. These fears continue to haunt us, the uncertainty they create doing more to harm our long-term health and happiness than Frankenstein ever could.
What’s important to remember is that fear is an emotional reaction and one over which we have control. We can choose to either ignore and avoid it or welcome it into our homes and lives.
COVID-19 still is, and likely will continue to be, with us for quite some time. The financial and economic impact will linger in the minds of consumers and investors. You don’t go through experiences like this and lackadaisically waive them off as an anomaly. Further clouding the outlook is peoples’ willingness to receive a vaccine if and when one becomes widely available. There will be those who either reject the idea of a vaccine altogether or do not trust one so quickly and readily available. Fear is a powerful and deep emotion. Frustration will abound as people try to understand how to live, work, and engage with one another safely.
Additionally, we are in the midst of a hyper-partisan election. This doesn’t seem surprising given the discourse of the past few years. Yet the weight is palpable, and more Americans indicated in a recent poll that they find it likely that some level of violence will erupt post-election. Whether founded or not, fear is driving the actions of some and remains front-of-mind for many.
So, it seems like a good time to be scared. In the markets, this tends to correlate to increased levels of volatility. The more uncertain and nervous investors are, the wider the price swings. But think back to another time it felt right to be scared, perhaps March of this year? The markets hit an all-time high on February 19, only to fall some 34% in 33 days on news that the virus was spreading worldwide. Yet, by August 18, the markets had not only recovered, but they also had advanced.
The decline was normal; what was unprecedented is the speed at which the market fell. The S&P 500 has declined about a third, on average, every five years or so since the end of World War II. In those 75 years, the index has gone from 15 to today’s levels of around 3,500. The history lesson is declines have not lasted, and the long-term trend of higher valuations has continued. It is hard to argue with these facts.
It is important to note that since March, the news concerning the virus, economy, and corporate earnings continued to be negative. What we learn from this is twofold: the speed and trajectory of the recovery in market value sometimes mirror the violent decline. Additionally, the market resumes its advance to new high ground in advance of an “all clear” sign. Even though the picture looks very uncertain, some might call it negative, the markets recover and advance. If you wait until everything looks good, you’ve likely missed the best buying opportunity. Using a strategy of wait and see, historically, means you miss out on much of any price recovery.
The most valuable lesson is that markets cannot be timed.
No amount of study, economic theory, commentary, or forecasting could have ever prepared us for the dramatic events of the past eight months. Instead, return to what can be controlled. Have six months of your spending in an emergency reserve. Have a long-term plan designed to work through the inevitable fads, temporary market declines, and recoveries that will happen during a lifetime of investing. This works to remove emotion and fear from your decision-making. It acts as insulation from the unknown.
Over the coming weeks and months, there will be much to fear. But fear is only a reaction, and we can work to control our reactions. Like a muscle, every time we choose not to react to fear, we gain a rep, and more reps lead to more strength. But unlike the exercise, we have another option: simply ignore the fear. Know that this fear will pass in time, and the only lasting effect will be how you chose to react to it.