So much for the Santa Claus rally predicted in several financial publications lately. There’s been precious little festive cheer on the trading floor just lately.
For many investors, especially those who are close to retirement, the overriding emotion this Christmas will be one of fear. Believe me, I’ve been there myself. Before I started reading about market history, behavioural finance and the importance of taking a long-term view, I worried more than anyone about market volatility. The global financial crisis actually made me physically ill.
Fear is a hugely powerful emotion. It makes us do irrational things, and the sad fact is that, in the context of investing, there’s no shortage of people who want to take advantage.
To quote an excellent post the other day by Robert Seawright: “When the markets are roiling, fear is pitched all day, every day, and human nature buys it. And pays a premium. A very big premium.”
“Fear makes money,” says Daniel Gardner in his book The Science of Fear. “The countless companies and consultants in the business of protecting the fearful from whatever they may fear know it only too well. The more fear, the better the sales.”
So, what’s the answer, apart from steering well clear of salespeople?
First things first: don’t feed the fear. When behavioural finance expert Greg Davies was invited on to Bloomberg to talk about the market rout in 2008, he was asked, live on air, what investors should do if they’re really worried. “They should stop watching Bloomberg for a start,” he replied. They don’t tend to invite him any more.
But, more importantly, you need to do what I did and read. Arm yourself with an understanding of the bigger picture.
To do it properly, it’s going to take you a little while. If you don’t want to devote that much time to it, you could watch a series of videos I produced for Sensible Investing TV back in 2013, entitled Stock Market History: A Crash Course for Investors.
Even quicker would be to watch a short video just released by Dimensional Fund Advisors, on how markets reward investors who stay disciplined at times such as these. The video is presented by DFA’s Vice-President and Head of Advisor Communication, Jake DeKinder.
In the video, Jake says this:
“Recent events have increased the feeling of uncertainty and may have led some to question whether to not to make changes to their investment approach.
“It’s important to remember that while these events might seem frightening in the moment, they are not necessarily unique or unusual.
“Throughout history capital markets have rewarded investors who are able to stay disciplined. After many major events, financial markets have recovered and delivered positive returns.”
So what sorts of events is Jake referring to? Well, here’s a series of graphs showing how a balanced portfolio comprising 60% equities and 40% bonds fared in the one, three and five years following the last six major market downturns:
What these graphs show very clearly is that those who stayed invested while so many others didn’t were amply rewarded on each occasion.
Here’s Jake DeKinder again:
“Over the long term, investors who have been able to remain patient and tune out the short-term noise surrounding these events have been rewarded for doing so.
“In the face of uncertainty, it’s important to remember this historical perspective, and focus on the things we can control, rather than the things we can’t.”
If you’re in any doubt as to what, if anything, you should be doing, ask your financial adviser; and if you don’t have one, why not see this as an opportunity to look for one?
Otherwise, tune out the noise. Think long term. Disregard anything that’s out of your control. And most important of all, fear not. Christmas is costly enough without baling out of the stock market.
Here’s the Dimensional video referred to in this article:
Dimensional Fund Advisors: Markets reward discipline
And here’s my series on market history:
You can find more useful videos on The Evidence-Based investor here.
Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
