Most of my writing lately has focused on the important subject of investor psychology.
My reasons for doing so are specific – because the investment brain is not hardwired for success, quite the opposite, actually, it’s set up for failure.
That’s why it’s imperative to address the shortcomings of human psychology and, by extension, investor behavior.
You are in control of your investment results more than you realize.
In today’s topsy-turvy world of political, economic, and geopolitical turmoil, stock market volatility is top of mind for investors.
It’s been a hell of a last decade with market crashes, pandemics, out-of-control inflation, political infighting, record levels of public debt, tariffs – I could go on endlessly, but you get the idea.
Jamie Dimon, the CEO of JPMorgan Chase, one of the largest banks in the world, recently quipped, “There continues to be a heightened degree of uncertainty stemming from complex geopolitical conditions, tariffs, trade uncertainty, elevated asset prices, and the risk of sticky inflation”. It seems that not even the smartest people in the world are immune to volatility’s iron-fisted grip.
If there is a crisis to be had, you can bet your last dollar that financial journalism will take the ball and run with it by highlighting any negative or scary parts of any statement or story.
It’s in their DNA.
So, what’s an investor to do? How can mom and pop investors fight their brains and overcome their behavioral shortcomings when the tides of volatility rear their ugly heads?
Let me draw your attention, as gently as possible, to the fact that overcoming the fear created by volatility is easier to overcome than you thought possible.
As a serious investor whose primary focus is a well-crafted long-term plan, you are not, in fact, investing in the economy at all. You’re not investing in the “stock market” as such. Rather, you are an investor in companies. This is a critical distinction – perhaps the critical distinction.
Ownership of these companies that substantially exist to seek profits over the long term is the bastion of freedom from the chains of volatility.
They are, by and large, managed by executive teams and overseen by boards of directors committed to preserving the shareholders’ capital and acting opportunistically in crises.
When breaking the chains of fear from worrying about volatility, one quickly realizes that while volatility itself will ALWAYS be part of the investment journey, we recognize that nothing that managements do can ever immunize their stocks from significant declines when a real crisis hits.
It is better to accept that fact than to deny it.
And yet, your brain wants to deny it. Despite the hard evidence that ignoring volatility actually makes you a BETTER investor.
Just in the first 25 years of this century, the S&P 500 halved TWICE in 10-year periods (2000-02 and 2007-09) during the dot-com implosion and the Global Financial Crisis, respectively. COVID further eroded any semblance of confidence when the government made a disastrous decision to close down the economy, and the markets dropped by a third in just one month.
And then, as if to kick your dog after slapping you in the face, the markets were cut again by 25% in an inflation-riddled environment that saw inflation run at 9% (a special thank you to Uncle Sam for igniting the flames of inflation), and then the Fed increased interest rates further and faster than ever in its history.
And I won’t even mention the havoc wreaked by the tariff tantrum (a drop of 20% in the S&P 500).
And yet . . .
$100,000 invested in the S&P 500 just before the dot-com bubble popped and left to compound (taxes paid from another source), had grown to well over $700,000 at the end of this October.
While that one shocking statistic proves absolutely nothing about the future, it should provide you with easy comfort to know that the companies you own have, in the long run, consistently triumphed over macroeconomic crises and market crashes of every description.
Consider your fear of volatility and investment behavioral shortcomings cured.
You’re welcome!
Stay the course, my friends.