In fact there are times when our discipline as investors can be sorely tested. The last few months, for example, have been quite challenging. Stock prices have fallen around the world since January and, at the time of writing, we’re still in bear market territory.
Reducing your equity exposure after markets have fallen is a bad idea, so if you’ve managed to resist that temptation so far, well done.
But we’re not out of the woods yet. The market downturn may still have some way to run, and the danger with a bear market is that it becomes more and more tempting to capitulate the longer it goes on and the further markets fall. Selling equities at or near a market bottom can be very costly indeed.
So, how do you avoid falling into that trap? Professor MEIR STATMAN from Santa Clara University is a world authority on behavioural finance. (1) Here are ten things he suggests investors remember if they start to feel their emotions getting the better of them.
It’s OK to feel anxious; it’s not OK to panic
“God or evolution planted emotions in us not to spite us but to help us. Emotions like hope and fear are very useful. Exaggerated emotions are not.”
Ordinary investors have a big advantage over the pros
“Professionals are subject to the same emotions (as amateurs) — and, crucially, they are observed by others. That is, I don’t disclose my portfolio, but they have no choice but to disclose theirs. People expect them to act, and so they do.”
Don’t pay too much attention to market forecasts in the media
“If you’ve watched CNBC, have you noticed there are two experts? One says the market is going to go up and the other says the market is going to go down. Neither of them knows anything; they’re just taking guesses.”
Don’t be tempted to time the market: it’s harder than you think
“People see trading as the equivalent of playing tennis against a training wall, which is really very, very easy. But trading is like playing tennis against Djokovic.”
Getting out of the market creates a new problem — when to get back in
“If you are fearful and you sell now, you have to make the decision when to get back in. They say wise people don’t get into holes that smart people can climb out of, and I would rather be wise than smart.”
Never trade on impulse; allow time for your emotions to subside
“It’s not that I do not feel anxious; I do. But I just don’t act on it, in the same way that I count to ten when I’m angry before I open my mouth.”
Stay humble — and know what you don’t know
“Every time you feel like now is the time to sell, ask yourself: What do you know that other people, including the professionals, do not know? The true answer for most people, most of the time, is nothing!”
Put things in perspective: the stock market is just the stock market
“People think about the risk to their portfolio, and I say that if you want to take risk, get married, and if you want more risk, have children. You have to put it in perspective and know that this is not the end of the world.”
Speak to your adviser if you have one; find one if you don’t
“Financial advisers can be really, really useful in a bear market. They are really earning their fees when they dissuade panicky investors from doing something stupid.”
Finally, a message for young investors: Don’t be tempted to take a punt on bombed-out cryptocurrencies
“Cryptocurrency is a lottery ticket. The way to get ahead in life is not by being lucky, it is by education and enterprise. And when you make it by education or enterprise, you will have more than money; you will also have a vocation.”
Did you see the interview with Professor Statman in Episode 3 of The Investing Show? You can watch it here: Episode 3 of The Investing Show.
You may also find these two articles about the market downturn helpful:
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