Investors and Market Timing
Anyone who has watched or played sport at a competitive level knows how much emotions can swing during a game. In the course of a couple of hours, the mood can jump from optimism when your team takes an early lead, to frustration as the opposition equalises, to elation as you score again to exasperation and fear as the other team takes control.
It’s the same with investing in volatile markets. A fall of 30% may incite fear of further declines and even an assessment of future plans, pushing some to sell in panic. Then a recovery of 20% drives optimism and FOMO and jumping back in ready for the ongoing rise. This down 30%, up 20% is the actual experience of millions of investors in 2022. Now every analyst in town has a view on whether we’ve seen the bottom.
One of the most famous phrases in investing comes from Sir John Templeton who said,
“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.”
The bull market died after the post-pandemic euphoria at the end of 2021, and the carcass rotted for six months, but then we have seen a strong recovery since mid-June. Anyone trying to guess whether a new bull is galloping should check the latest chart from JP Morgan with 20 years returns across asset classes. It demonstrates that equities (shares) and real estate investment trusts (REITs) were the place to be, so investors are obviously looking for entry points into the various investment markets.
But look at the orange bar. The ‘average investor’ achieved poor returns due to bad timing of entry and exits, buying in euphoria and selling in pessimism.
Source: J.P. Morgan Asset Management’s Guide to the Markets for 3Q 2022.
There are two key behavioural actions which can help avoid these poor investor returns. First, is to remove ourselves from emotional stimulus – turn off financial market news and check our portfolios less frequently. Long-term investors should stop doing anything that provokes a short-term emotional response. Second, we should never make in-the-moment investment decisions, as these are likely to be driven by how we feel at that specific point in time. We should always step away and hold off from making a decision, and reflect on it outside of the hot state we might find ourselves in.
These actions are no panacea; we cannot disconnect ourselves from the impact of emotions on our investment decisions. We know, however, that the negative feelings of stress, anxiety and fear that we experience during volatile markets are likely to encourage some of our worst behaviours and we must do our best to quell them.
If you have any questions/thoughts in relation to this article or would like more information, please contact Gordon Thoms or David Conte at Calibre Private Wealth Advisers on ph. (03) 9824 2777 or email us here.
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