Wall Street has an old saying:
“The market is driven by just two emotions: fear and greed.”
Although this is a simplification, it is firmly rooted in truth, proven time and time again.
We are emotional beings, our evolution to the top of the food chain was driven predominantly by the addition of intellect and emotions, allowing us to predict a bad situation and take corrective action, to survive another day. This part of our DNA is still very much ingrained in all of us – an event triggers a sense of impending doom that drives our bodies into a Sympathetic Nervous-System response, and we prepare for fight or flight. A strong sense of unrest forces you to sit up, get up, move away from the area of perceived danger, survive! We see the pain of loss much worse than the pleasure of gain due to this exact reason. An evolutionary trait that served us well in the time of loin-cloths and Sabre-tooth Tigers, but for the modern man, this can be DEVASTATING!
With the media frenzy over COVID-19, investors have to be careful not to allow emotions to take over, resulting in short-term decisions that could impact your long-term financial well being. The immediate sense of impending doom is fleeting and should be discounted down to the point where it has minimal influence over our investment strategies. The art of excellent investment management lies in the ability to separate the emotions from the goals – to be able to cut through the emotional-fog that can blind us and keep the focus on the long term goals and strategies. The last few days’ events in the world markets could define 2020. The scale of the sell-off will be historical, but if we look at comparable events from our past, like the Global Financial Crisis in 2008, the rand crisis, and of course, 9/11 that defined 2001, history has shown us that people and markets are resilient and bounce back fast. In the past five years, US markets have fallen more than 10% on five different occasions, yet the S&P 500 index is still up 40% over this period.
From the South African investor perspective, adding to the pain of this experience is the recent past of lackluster performance from the market and now the unprecedented market volatility. There is certainly a level of panic reflected in market movements as the stress of seeing wealth shrink drives investors to indulge fight-or-flight instincts. It is during times like these that you need to trust that the market fundamentals are still working and speak to your Wealth Manager about your concerns and fears.
We are not diminishing the impact this event will have on world growth and the likelihood that the world could face recession. Our message is that your portfolio is well managed and well-diversified, and for this reason, when the recovery occurs, you will benefit.
Speak to a GCI Wealth Manager today if you have any concerns.