Yield curves have inverted, recession is expected soon, this recession will be worse than the last !!!
It's all doom and gloom, or is it?
Sharp falls in market prices generally make headlines across all media. And no sooner when the index falls, predictions of more doom start pouring in from all corners. Clearly, the mood is that of panic and fear.
And we don't blame investors if they are unwilling to invest or stay invested at this point in time. Simply because our brains are hardwired to make us run from danger at the first sign of it.
And when it comes to investing, nothing can be more scary than seeing your investment portfolio down by 30-40%. The truth is that investment decisions of the average investor are governed by fear!
Average investors tend to exit their investment position when they start seeing drops of 20-25% or more. That’s one angle to it. However, the actual fear is of higher losses we may incur by not selling.
Now let us see how fear rules our buying decisions. Head back straight to 2008 when the credit crisis was at its peak. Most stocks were trading at dirt cheap valuations then. Yet there were very few people who stuck their neck out to buy. Why? The answer is again fear. And this happened because their thinking was based on the perceived situation in the market place.
Outside environment created a sense of panic which restricted individuals to buy. But those who overcame fear made a pot of gold out of their investments.
Thus, it can be seen that FEAR makes us take decisions which are not favourable over the long term. However, overcoming fear does not mean you have to be contrarian. It means executing the decision if you feel the process you followed to arrive at any decision (buy or sell) is right.
Stay invested without fear when risks are known. In the long-term prices always reflect fundamentals, and markets always rise in value given an investment term of 5-8 years or more.
Our investment portfolios carry different types of risk, and some of the risks have a lot to do with your behaviour and of others around you, such as:
- The risk of selling or exiting at the wrong time (out of fear), especially when markets are down.
- The risk of investing in a stock just because others in your office or friend circle (out of greed) are buying the same.
- Investing too much in one particular investment because it looks the best on paper.
In summary, the best thing to do is to stay true to the financial plan you have set for yourself with the help of your financial advisor, and not worry too much about what the markets are doing.
There are better things to think about in life than just your investment portfolio performance. Focus on your investment goals, not market returns.