Think about the news, an industry that is motivated and paid for by advertisers. What do advertisers want? To promote their goods and services to the most people possible. What gets people watching/listening? The negative….Market Crash, Markets in Turmoil, big bright red flashing colors. The best rated shows on TV today are reality TV. And the highest rated episodes happens when two women on Bravo fight over something trivial.
Social Media is no different. The more divisive the comment, the higher engagement it receives. Whether it be political, religious, slanderous about a person or a company, the negative receives the most attention.
Think about it…how many viewers do you think a morning show would receive if the anchor came on and said, “Gorgeous Day, House Democrats and Republicans gathered together for the good of all people, the Housewives of Orange County decided to donate all their shoe closets to those less fortunate…” Boring….wouldn’t catch an eyeball.
This starting paragraph could be used for a BRAKs speech or a financial blog.
A long time saying in behavioral finance (yes, that’s actually a thing), is that we feel twice as much pain on a loss of 10% and we do pleasure on that of a 10% gain. Crazy. 10% down feels twice as bad as 10% up feels good. I guess based on that statistic, a 50% loss would have even the great Warren Buffett throwing in the towel.
This is not brought about by the past few bear markets, or the crash of 87, or even the Great Depression. It’s primitive. We were built to be survivors. That’s why we are on top of the food ladder and other species are not. (Side note –I’m currently reading a book called Sapiens. A brief history of humankind and BOOM, mind blowing). This expulsion of energy and flood of emotion of negativity is not something we will be able to grow out of, it’s instinctively us. The fear created when competing against lions and dinosaurs for food lies deep within us. Marketers know this and play on it every day.
In the big scheme of things, we are relatively new to all of this. Stock markets have only been around for 150 years or so and investing for the average Joe is at best one-third of that. Tens of thousands of years of evolution cannot compete with a 50-year chart. It’s not your fault, it’s your DNA.
There are many studies out there that show how the retail investors (me and you) underperform the institutional investor by about 50%. With the main reason being that we make emotional decisions. Most institutions base their investment decisions in the form of a policy statement. Meaning they do analysis on how much risk they are prepared to take and set an asset allocation for their portfolio that is appropriate. Regardless of how any asset performs in a certain period of time, they rebalance the portfolio ensuring they buy more of the asset that is losing and selling some of the asset that has done well. By performing this act, they are ensuring that their risk stays within their parameters and sets them up to outperform when that asset does indeed turn around and lead.
Institutions are entities, but they don’t live and breathe, or have emotions. Reviews are generally done on a set date each quarter or bi-annually and not when the market has dropped by X%.
Education holds the key to most things in life and especially investing. Although investing history pales in comparison to our genetics, there is enough data to give you some insights to the future.
As you can see, the longer your time horizon the more predictable your outcome will be.
Don’t fret, it’s not you, it’s your DNA. Educate, Automate, and Forget it Mate!!!!
Mick Graham, CPM®, AIF®
Financial Advisor/Branch Manager Raymond James Melbourne, FL
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mick Graham and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.