After the very nice bull run since 2008 that should have seen a doubling or tripling of an investment, you’d be forgiven for thinking it is going to last forever. The debt crises of 2008 left deep scars on the emotions of most investors who saw 30% or more of the capital in their investments evaporate. Just prior to the crash of 2008 there was a feeding frenzy on the stock exchange – a lot of that from individual investors. The smart investors were already starting to sell out of stock portfolios in Nov 2007. What I am seeing now is much of the same sort of behaviour, especially from individual investors, and it is time to take a step back and make sure you’re not putting those hard-earned investments at risk.
Buy high, sell low : This phenomenon can be explained by the new acronym, FOMO. Fear of missing out. The stock market breathes in and out, that is just in it’s nature. Sometimes it hiccups, jumping up and down by a few percentage points for no reason. Occasionally, just like us, it heaves a heavy sigh and sheds some 10, 20, 30%. It’s going to come sooner or later and the longer the bull-run continues, the probability grows. When individuals wake up to the fact that everyone in the stock market has doubled or tripled their money, FOMO kicks in. More often than not these ‘inexperienced’ investors will buy shares online, get involved in day-trading or (more sensibly) buy ETFs or other trackers – Of course prudently saving stockbroker or advisory fees of 1%. Winning! Those financial ‘nannies’ (like me) might have been as silly as to try and tell you that stocks are a long term (8 yr plus) investment and try and get you to make your investment less ‘aggressive. What! And leave all that money on the table! Then the market turns, and those investors hang on and hang on hoping for a turn around, until they can take it no more and bail.
Allowing greed or fear to rule your decisions: Many people will get to the later years in their life and wake-up to the fact that they have not made enough provisions for retirement and fear kicks in. There are a number of ways to remedy this. You could start saving more – slow and painful but effective. You could lower your expectations for retirement – again painful but hopefully far enough in the future for you to ‘get used to it’. Finally, you could tweak your asset allocation (cash, bonds, property, stocks – read more HERE) so that you get more growth. Painless! Yay! Of course there are limits, both to its effectiveness and prudence. Can you afford to put a 30% hole in your capital in the short to medium term? If you’re 10-15 years from retirement then yes, you can probably afford to make your investment much more aggressive. Less than that? Not so much. Given the choice between a painful and an easy choice, easy is going to win – unless you step in and recognise the actions of the greedy demon whispering in your ear.