Market volatility, even in the face of Covid-19, is nothing new. Photo / Supplied
Market volatility, even in the face of Covid-19, is nothing new. Photo / Supplied
Pick your favourite equity index around the world; if it wasn't down 3 per cent by the third week of March, it did better than the most.
All the stock market gains since 2017 had been erased in March 2020, and it is considered as the worst month since theGreat Depression (1920-1933). The result has been a level of volatility and occasional panic in financial markets not seen since 2011.
If you are not checking your investment portfolio balance all the time, you must have a disciplined long-term focus and a very good financial adviser by your side.
But if you are frequently checking the portfolio balance, you may see a rise in your anxiety and stress levels. Behavioural finance studies into investor behaviour confirm this.
Their consistent finding, year after year, is that investors tend to be more cautious when they check portfolios regularly, with adverse long-term consequences for their investing goals.
I was prompted to write this column after seeing a full-page magazine advertisement from a big financial services company detailing the virtues of its smartphone app that allows you at any time – in the ad, the setting is a near-retiree couple taking a nature walk with a dog – to check and update your long-term financial plan as market forces change.
Really? The purpose of a sound financial plan is that it frees you from having to check and recheck your portfolio every day, week, month or even quarter – and most definitely not while walking your dog. The ability to make changes while strolling through a park is a recipe for self-destructive investing behaviour.
A combined study by two professors, Shlomo Benartzi and Richard Thaler (a 2015 Nobel laureate in economics), at two of the most prestigious universities in the US, conducted simulations comparing the behaviour of investors who frequently checked their portfolios versus those who did so infrequently.
The findings were the former group made changes to their portfolio structuring and constructed a conservative portfolio, with far lower equity exposure than the latter group. Not surprisingly, it led the more frequent checkers to have significantly poorer performance over time. The study called this phenomenon "myopic loss aversion."
I say they've nailed the name. Married to an optometrist, I hear the word "myopic" a lot. It means short-sighted in optometry language and lacking foresight in investing lingo.
In this study, investors are assumed to be "loss averse'', meaning that they are distinctly more sensitive to losses than to gains.
To be clear, this study was published in 1995 before the modern internet times. In the 1980s and 1990s, many investors relied on monthly or quarterly statements to determine their net worth. So, the study considered frequent checkers as those who looked at their portfolios every month or quarter.
Nick Stewart
Calling those investors "frequent checkers" seems old-fashioned since now they would be considered active investors. But the pattern that was discovered in this study almost three decades ago applies in today's 24/7 news cycle world.
Market volatility, even in the face of Covid-19, is nothing new. Volatility is a part of investing, always has been. As an investor, you should expect occasional bumps in the road and always remember the bigger picture: you are here for the long-term returns.
Markets are not any more volatile than they've been in the past. What's different now is how quickly risks can appear and affect investments. It could be a border reopening announcement, a possible new wave of infections or even a tweet.
Part of this is driven by technology, which now allows information to be distributed and consumed faster than ever before. That makes it easier and quicker for news – both good and bad – to make its way to markets.
Whatever the cause, there are two things investors should remember. First and most important: volatility is typically a short-term phenomenon, and retirement is a long-term prospect. Sticking to a long-term investment plan can be one way to offset the stresses of volatility.
Secondly, markets will eventually learn to adapt to the speed of information. Markets learn to separate noise from accurate data. That's something they have always done. It will just take some time for markets to learn to work at this new higher speed.
Nick Stewart is an Authorised Financial Adviser and CEO at Stewart Group, A Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
