Everyone is well aware of the market crash that happened around 2008-2009 when many investors ran to the sidelines, essentially scared out of investing in stocks. Five to six years later, some of those investors are still waiting, because they are unsure if they can trust the stability of the market. However, the stock market is inherently unpredictable, and waiting around for the right moment to get back in is pointless. There isn’t a “right” time to jump back into the market. It’s just a matter of moving forward and putting the crash behind us.
Mark Matson recently appeared on CNBC to share his thoughts on whether or not investors can trust the market again. CNBC’s host asked Matson if the recent Fed statement about the economy was a green light for U.S. equities. Matson explained that investors should not focus on short-term Fed statements and should forget about currencies. Instead, investors should think long-term about equities, which have historically been one of the greatest wealth creation tools. While every adviser has its own strategy and past performance doesn’t guarantee future results, Matson and his team of advisers follow this investment strategy.
Matson also discussed the realities of how investors reacted during the 2008 recession and about how the market has rebounded. Even so, investors are still hesitant to invest. Matson suggests buying equities and holding on tight, because the focus should be on the long term. Investors should stop trying to predict the next 10% market move, no one can foresee the future of the market.
We’ve learned a lot about investing behavior in the last 15 or 20 years. Investors, left to their own devices, tend to trade more than they should. For some investors, this is probably due to over confidence in their ability to trade. People hold on to their losing investments and sell their winners and, to some extent, this makes emotional sense. When you sell at a loss, you feel a bad; when you sell for a gain you think ‘yeah I nailed that one.’ But, especially in taxable accounts, it’s a bad strategy. You should be delaying taxes, not accelerating them.
Another big thing that investors tend to do is chase performance. Investors buy the thing they wished they bought last year. Unfortunately, this is basically an attempt to time the market, which is generally ineffective. Investors tend to buy at peaks or near peaks and sell in troughs. This doesn’t serve them well even though it’s easy to understand why they do it.
One bias that a lot of investors have is that when it comes to buying stocks, they tend to buy things that catch their attention. They buy things that are in the news, that they read about, someone tells them about. Now if you think about it, there are thousands of stocks to choose from and investors generally can only buy a few. One of the ways that they narrow down the set is by focusing on the stocks that catch their attention, but those are not necessarily the best stocks to be buying.
The best course of action for the vast majority of individual investors is to buy a low-cost, well diversified mutual fund. Index funds or other passive investing tends to outperform active investing. Keeping your fees low is really important; that’s like money in the bank. Be sure you’re diversified and don’t spend your time trying to beat the market.
One way advisers can make use of behavioral finance is to sit down with your clients in advance, in a good calm time and talk about some common investor behaviors that can sabotage their portfolios. Especially behaviors like selling in a panic or deciding to buy that hot stock or asset class. Having the discussion before your client actually experiences it allows you to refer back to it and say ‘remember when we talked about this and I explained my investment philosophy is long run, buy and hold, don’t chase the latest performance, don’t panic when the market goes down.’ Having that discussion in advance can be really helpful.