A critical element in successful investing is “how you react to feelings of both discomfort during the market’s fear cycle and invincibility when markets are booming,” writes Marty Leclerc earlier this month for Forbes. During periods when share prices drop, he says, data shows that most investors want to end the discomfort, which is the “root cause of poor investment results.” Leclerc explains why investors react so intensely to market shifts:
- Our brains are hard-wired to avoid pain at all costs, which is why investors who rarely look at their portfolios “do significantly better than those who do frequent reviews.”
- People have unrealistic expectations of volatility. “Normal”, Leclerc argues, is for the stock market to drop 10% in any given year and 20% every 3 ½ years.
- Investors get “spooked” he says, because of the belief that a company’s share price always incorporates and reflects all relevant information. In other words, lower share price is “evidence the world has changed for the worse and proof they have made a mistake.”
Leclerc reminds his readers that stock markets provide a convenient way of buying and selling businesses, and that’s all. He calls it an “emotional creature that is often wrong and prone to creating feelings that can result in real harm to participants.”