There are no guarantees in investing. So I will say this: almost always, an investors long-term performance is related to their behaviors. Most successful investors develop a long-term orientation that successfully drives their wealth building over the years. For some this will look like benign neglect. They develop a strategy, make their contributions automatic and infrequently, if ever, check the progress of their accounts. In fact, one study by Fidelity indicated that the best performing accounts in their system was from people who had forgotten that they had an account. Others may be incredibly rational with nerves of steel, successfully adding funds to their accounts during times of fear and doubt. But whatever the personal traits that enable it, successful long-term investors are able to resist the siren songs of both fear and greed and keep to their game over the long haul.
My personal and professional experience indicates that people aren’t poor investors all the time. Most of the time they are relatively disciplined and rational. But during periods of extreme, we can make errors that cause severe underperformance. I’ve talked with any number of investors that exited the market during the great recession of 2008-2009 subsequently missing out on the almost 10 year bull market that followed. I personally participated in the tech bubble; I put significant cash to work in technology companies in late 1999. Yes, it was me who popped the tech bubble. And we all probably know someone who regrets taking the crypto-currency plunge in 2017. This is why risk-management is so important. None of the errors listed above are due to bad math skills, they are due to our feelings: fear of being left behind, greed, nervousness about our losses, envy that our neighbor made a bunch of money and we didn’t, etc.
Luckily, the last several months provided us with a little experiment on our personal risk tolerance. The last two months have been volatile. In December, the S&P 500 dropped 9%. But that 9% number paints a fairly subdued picture. In fact, from December 1 to Christmas Eve the index dropped 15% before rebounding slightly into year-end. This marks the worst December performance since 1931. Since the beginning of 2019, the market has bounced back 8%. Here’s a chart of the S&P and tech-heavy Nasdaq since the peak in October of 2018:
The peak-to-trough drop was around 20% for the S&P and 22% for the Nasdaq. I’ve had several people (not clients) tell me how “freaked out” they were by December. On the other hand, I had several inquiries from people asking if they should put some money in the market while it was down, or maybe re-balance.
How you reacted to this brief bout of volatility can tell you a lot about your risk tolerance. If December’s market correction worried you or kept you up at night, you may have too much exposure to stocks. Looking at little lines on a graph is one thing, but actually seeing the impact in real dollars on your account statement is another. I would encourage you to think on the recent events as it relates to your investment strategy. How did it make you feel? How did you react? Did you take any action as a result? Do you think you would have taken action if the decline continued?
The last several months gives us a small glimpse of our tolerance for stock market volatility. We should use what we have learned about ourselves to make any adjustments to our strategies that might be necessary. It just may make us better investors in the long run.
Note: The contents of this site are general in nature and not intended as specific investment advice. All investments are subject to risk; including loss of investment value. If you have any question regarding investments or concepts in these pages, please consult with an investment professional.