Julia Warrander and Russell Waite reply:
WE humans are amazing creatures, with our minds and bodies able to do extraordinary things.
We can see a ball thrown from a distance, instantly assess its speed and trajectory and then quickly move our body and hands to catch it. We can learn new languages, recognise many different faces, play music, produce wonderful works of art, and both design and utilise technology to achieve things only limited by our imagination.
Despite these talents, we are also capable of being extraordinarily irrational. In fact, scientists have concluded we are predictably so, to the point it is a systematic problem we all face and often leads us to making very poor decisions, despite employing a lot of mental energy trying to do the reverse.
Being aware our brain is ‘hardwired’ to reflex, before it reflects – in other words, our emotions commonly override our logic – is an important step in understanding how we think about money, particularly in the context of investing.
All this brings us to the here and now and the importance for investors to maintain composure during this period of heightened financial market volatility. It is naturally ‘human’ to be actively seeking out all the bad news, worrying about losses and being fearful of what the future might bring.
The emotional ‘pain’ of losing money – even a paper loss – has been proven to far outweigh the emotional ‘joy’ of making money and in this uncertain environment, the reflex is to lose confidence.
However, taking time to reflect will lead to better investment decisions. Based on our experience, we encourage investors to stay composed by focusing on three basic principles:
1. Keep market volatility in perspective; it is an unavoidable part of investing.
2. Focus on the long term; history tells us that markets have rewarded those who have stayed invested for extended periods of time.
3. Maintain portfolio discipline; stay diversified across asset classes, geographies, style and approach.
We have one last piece of advice to make and this is around ‘market timing’. Picking the lows is nearly impossible and could be likened to catching a falling knife. The vast majority of us will be far more successful at catching a ball.
