While preparing for our next gathering of The Women’s Roundtable later this month, “Keep Calm & Invest On: Taking the Emotion Out of Your Money”, where we plan to discuss investor behaviors and risk evaluations, we began to wonder what inherent reaction investors have in a market environment like the one we are experiencing now — a highly volatile, low return environment. Let’s explain further.
Safe or in Danger
As humans, we are built to perceive ourselves as either safe or in danger, and this concept can be applied to the markets. In years when the market is moving higher, investors perceive themselves to be safe and perhaps make poor decisions such as moving to a more aggressive strategy than his or her risk tolerance allows. When the market is moving lower, like it did to start this year with a correction of more than 10%, investors perceive themselves to be in danger and perhaps make poor decisions such as selling positions low.
The Question
This begs the question — how do investors perceive themselves when the market is rather flat and aimless?
The markets have done little since the beginning of 2015, with the MSCI All Country World Index declining -2.36% in 2015 and returning +2.30% YTD 2016 through June 3. Frustration with this lack of trajectory appears to be a common feeling among investors and advisors alike. Jeffrey Saut, Chief Investment Strategist at St. Petersburg, Florida-based Raymond James Financial Inc., which oversees $500 billion, was quoted in the Washington Post on May 23, 2016: “The past 19 months have been the most difficult stock market I have ever experienced in more than 50 years of investing,” In bear markets, “at least we knew stocks were going to go down. However, over the past 19 months the up one session, and down the next, has been extraordinarily frustrating.”
Frustration vs. Patience
This frustration may lead some investors to make poor decisions, just as the perception of being safe or in danger can. As maddening as slightly negative to slightly positive returns can be, years like these are not rare and can be expected about 10% of the time, according to the CNBC article “S&P 500 is Having a Dull Year, and That’s Good for Investors”, dated August 2015: “Going back to 1918, there are 11 instances of calendar years in which the S&P 500 was up or down by 3 percent or less, according to S&P Capital IQ.” Moreover, “In the subsequent calendar year, the market rose an average 13.3 percent and gained in price 82 percent of the time (nine of 11 instances), according to data from Sam Stovall, chief investment strategist at S&P Equity Research Services.”
We of course cannot know if solid positive returns are just around the corner or the opposite, but what we do know is that investing in the stock market has been the best way to grow wealth over time. The market is a resilient thing. If you have a long-term strategy that abides your risk tolerance and the patience to fight the urge for drastic action when you feel safe, in danger, or just down-right frustrated, we believe you will benefit from staying the course.
The Women’s Roundtable
If you’d like to hear more about investor behavior and how to limit emotional reactions during market movements, please join us for The Women’s Roundtable wine and cheese gathering on June 29 at our office in downtown Oakland.
More on Investor Behavior
You can also access more on the topic from our website resource center and from this blog:
“Mind Over Money Matters: How Our Psychology Reduces Investment Returns”
Bell webinar, September 2015
“Why Momentum Exists: A Perspective on Investor Behavior”
Bell white paper, October 2012
“The Endowment Effect”
Bell blog post, October 2014
“Stress is Good”
Bell newsletter article from The Opening Bell, July 2014
“Building a Better Bunker Portfolio”
Bell newsletter article from The Opening Bell, April 2012
“Momentum Investing: How to Gauge the Market’s Opinion of the Future”
Bell white paper, September 2011