We humans are an interesting lot. We know what we’re supposed to do to generate the best outcome for ourselves – consistently eat well, exercise regularly, get enough sleep, save diligently – and yet our natural instincts for short-termism mean we’re often our own worst enemy.
Similarly, we know investing is almost always for the long term. And yet as soon as we invest in something, we watch its performance every month and panic when returns fall.
While understandable given the human condition, this reactionary approach can be detrimental to our long-term wealth accumulation.
As investor and columnist Francois Rochon once put it, “you have to learn to profit from market fluctuations, rather than suffer from them”.[1]
The case for equities
Take equities, for example. While it can be nerve-wrecking watching the stock market spike up and down, volatility is an inherent characteristic of the asset class. Sometimes these periods of wild fluctuations are long and sustained; yet history shows the equity market has still returned a very respectable amount in those times.
We can see this demonstrated clearly with Australian equities. Despite stock market crashes, the GFC, a global pandemic, and many other nail-biting crises, Australian shares have gone up significantly over the past 30 years, with an average per annum return of 9.8%. This means a $10,000 investment in 1992 grew to an investment value of $131,413 by 2022[2].
Behavioural finance
It’s no surprise that those moments of panic see many investors pull their funds even though they may know better – it’s the way we’re wired.
Behavioural finance explores the various cognitive biases, emotional factors and social influences that can impact financial decision-making.
A common bias we tend to have when making financial decisions is recency bias: the tendency to incorrectly believe that events that happened recently will happen again soon. For example, if a stock does well, investors are likely to flock to it (buying high), and if it drops, many investors will flee (selling low).
To combat this, investors should have a clear strategy that they stick with, despite their impulses and regardless of what trends they’re seeing in the short term.
Things to remember when investing
You’re in it for the long haul
Most investments are designed to be held for years, if not decades. Don’t be tempted to check your long-term investments daily. Remain disciplined with your strategy, and don’t drop out mid-race.
Keep a cool head
Like turbulence, volatility is just part of the ride. The market will fluctuate, and global crises will come and go, but the long-term investment growth will likely be worth it.
There are no crystal balls
No-one can pick the top or bottom of the market. Trying to chase performance or trends can be appealing, but over the long term you’re more likely to do better by making a plan and then sticking to it.
Eyes on the prize
Your decisions and strategy should be tailored to your unique circumstances. It’s essential you’re investing in line with your own financial goals, time horizon and the amount of risk you’re willing to withstand.
[2] www.vanguard.com.au/adviser/en/index-chart
The content contained in this article represents the opinions of the author/s. The author/s may hold either long or short positions in securities of various companies discussed in the article. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the author/s to express their personal views on investing and for the entertainment of the reader.
