A heady mix of coronavirus and an oil price war has sent markets into a tailspin this week. On both fronts, the near term outlook for equities is far from clear. But there’s also a sense that decisions made at moments like this can have a big impact on your long term returns…
With that in mind, there was an interesting note from Slater Investments this week, the small cap fund manager run by the widely-admired Mark Slater. In it, he said:
“It is worth bearing in mind that the tendency of investors to sell on bad news is nearly always detrimental to long term financial gain. It pays to look through the short-term ‘noise’ and hold on through periods of uncertainty for superior medium to long-term gains.”
For what it’s worth, Slater says he a buyer of shares in these markets (although he’ll be doing that “sensibly” (ie. not in one go)). But it’s fair to say that not all investors share his steely nerve.
Indeed, in spells of panic and volatility we’re all prone to making bad choices because of natural biases and emotions. From time to time I write about some of these mistakes, and now seems a good time to remember a few of them...
1. Action bias (patience is a virtue)
Faced with a penalty, goalkeepers who stay rooted to the spot save more goals than those who dive one way or the other. Yet being seen to make an effort is the reason why most will leap left or right. This is action bias… in action. When the optimal strategy is to do nothing, it can feel much safer to do ‘something’, whatever that might be.
Faced with falling markets, the instinct for many is to try and trade their way out of trouble. An urge to re-take control when others are losing their heads can lead to instinctive decision-making and costly over-trading.
The antidote is patience and planning. Having a pre-prepared strategy to deal with sudden sell-offs could save you from being caught up in short-term mayhem.
2. Recency bias (think long term)
No-one knows how serious coronavirus will turn out to be, and opinions are really divided. But what’s beyond doubt is that the market sell off has been very sharp. And it’s that recent experience that’s likely to be shaping the views of investors right now. This is recency bias.
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