Martin Pelletier: The risk of trying to time the market and position your portfolio based on emotions can be quite material
A trader works on the floor of the New York Stock Exchange. Photo by ANGELA WEISS/AFP via Getty Images files “God grant me the serenity to accept the things I cannot change, courage to change the things I can, and wisdom always to tell the difference” — Kurt Vonnegut, Slaughterhouse-Five.
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We live in a world that feeds off our anxiety. The more pronounced the event, the more coverage it receives, and all the likes and shares on social media only compound the effect.
As a result, we are constantly bombarded by subjective thinking, instead of objective. This can lead to inner conflict and anxiety because it alters our interpretation of events to what the outside world is telling us.
Beyond the broader life implications, anxiety can also wreak havoc in the investment world. Views are becoming more polarized and, in some cases, almost cultish in nature.
You have the financial doomsayers awaiting the ultimate collapse of the United States economy and its currency. There are also those claiming the world will soon end, because climate change is akin to an asteroid about to collide with the earth.
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I’m certainly not trying to downplay the seriousness of irresponsible monetary and fiscal policy nor the impact of worsening climate change, but perhaps in general we have become a little too far removed from the objective facts.
Where this gets outright dangerous is when it overpowers us, leading to extremes of either paralysis or overreacting to try to regain control over the narrative: I’m scared and don’t know what to do, or I’m right and you’re wrong.
This can happen on a smaller scale as well. The recent market action is a perfect example. Many are touting negative interpretations of the recovery, causing one to doubt whether to stay invested or not.
However, take a step back, look at the objective facts and realize the risk of trying to time the market and position your portfolio based on emotions can be quite material.
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Last year, Bank of America Corp. reviewed S&P 500 data going back to 1930 and found that if an investor missed the 10 best days each decade, their total return would be a paltry 28 per cent, versus 17,715 per cent if they had stayed invested. It also pointed out that the 10-year returns for the S&P 500 have been negative just six per cent of the time since 1929.
More On This Topic Three strategies to help you take the emotion out of investing Martin Pelletier: The end of cheap labour is a good thing for society, despite inflationary fears Beware of cherry pickers: Mixed economic data means bulls and bears both have strong cases How often you check your portfolio will also determine the probability of seeing a loss. In his book Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, former options trader Nassim Nicholas Taleb points out that if you look at your portfolio once a year, the likelihood of seeing a gain is 93 per cent. If you “check it every second, minute, hour or day, you have around a 50-per-cent chance of seeing a gain, which means you are just as likely to see a loss.”
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Article content This doesn’t mean you should simply buy and hold the market and never look at your statements — far from it. Rather, be cognizant about allowing emotions to influence your investment decisions, such as giving in to loss aversion and selling on market corrections or chasing returns for fear of missing out on market rallies.
It also helps to take an approach that is distinctly your own, not based on some equity benchmark, and certainly not on what others are doing or telling you what you should be doing.
In this regard, I am personally a fan of psychologist Alfred Adler’s approach, which I have found helpful in such situations, especially when it comes to removing anxiety. We all have the power and ability to not allow our past experiences and emotions to form the basis of our future by simply searching out the objective facts, ignoring the near-term subjective opinions of others and sticking to our own long-term game plan.
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Article content This requires courage to bet on rather against the collective, which history has clearly shown to be the winning trade.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
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