As uncomfortable as they can be, crashes and corrections are a big part of equity investing. It’s natural to start worrying when the value of your investments falls suddenly but, as behavioural scientist MEIR STATMAN explains in this video, there are ways of dealing with it rationally and sensibly.
Robin Powell: Crashes, corrections and bear markets are an integral part of equity investing. It’s very important during those periods that investors keep their discipline. Meir Statman, the behavioural scientist, says you need to remember that timing your exit from the market, and then your re-entry, is extremely difficult.
Meir Statman: People see trading as the equivalent of playing tennis against a trading wall – that it’s really very easy, you can place a serve just right to hit the ball right. But trading is like playing tennis against Djokovic. He pretends to hit it to the left, then hits it to the right just as you go to the wrong spot; and so every time you feel like now is the time to sell or buy more, you have to ask yourself: who is the idiot on the other side of the trade? What do you know that other people – professionals – do not know? And the answer, the true answer, for most people most of the time is nothing.
RP: Investors are often influenced by the financial media when markets are volatile. The problem is that people who come across as experts may be completely wrong.
MS: If you watch CNBC, have you noticed that there are two experts? They’re both wearing suits so you know that they’re experts, yet one says that the market is going to go up, and the other says the market is going to go down. And so you know that neither of them knows anything, that they are just making guesses – perhaps by tossing a coin. So, if you just look at it and you just listen, or rather watch, CNBC with the voice off; then you will be fine.
RP: For Meir Statman, it’s when markets have fallen that having a financial adviser you can turn to is especially valuable. Part of their job, if you like, is to stop you making a foolish decision.
MS: The first line of defence is to recognise that you don’t know anything more than others; and, just because you feel bad and panicky, there’s no reason for you to sell. But if this is not sufficient, then financial advisers are the second line of defence, and they can reason with people and explain precisely what they’re talking about, and say, “look, I understand what panic is, I understand what fear is. This is natural to me, too. My advantage over you is that I have learned things that I am now teaching you. And therefore, this is a good piece of advice: don’t do anything, or wait two weeks to see if you can cool down and change your mind.”
RP: In short, then, it’s perfectly natural to feel a sense of discomfort when the value of your investments falls sharply. But there are ways of dealing with it rationally.
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