Human beings are born with innate fears of falling and of loud noises. Without those fundamental fears, humans would probably have fallen off cliffs or been trampled by an angry mammoth long before we evolved to develop a stock market.
This might explain why a falling stock market can trigger such panic in investors.
In the middle of October 2018, all markets were falling. Among the losses, the Nikkei fell 4.1%, the Dow Jones Industrial Average lost 832 points and the S&P 500 dropped around 7% over the month – its worst one-month drop since 2011. European markets were down too, and Australia’s ASX 200 and All Ordinaries index slid with the general trend.
Everywhere investors looked, it seemed the sky was falling. Many investors were shaken.
Understanding Volatile Market
A volatile market can feel threatening and prompt investors to sell falling stocks, whether or not that’s a reasonable or helpful response.
This is because, alongside our fear response, humans have a tendency towards ‘loss aversion’ – the psychology that makes us much more sensitive to the impact of a potential financial loss than to the possibility of a financial gain, which in turn affects how we assess uncertainty.
Fear is a survival instinct, but instinct isn’t always the wisest judge of circumstances. Beyond our fear of falling and loud sounds, every other fear is learned – and can therefore be overcome.
Smart, well-informed investors know that many things aren’t as scary as they look and that risk assessment is best made from a position of calmness and consideration. It helps to have a knowledgeable, experienced market advisor like United Global Capital to make those assessments.
Despite the market drop in October, the US economy is performing strongly, with growth at an annual 4.%, unemployment at 3.7% and wages growth at 3%.
What Investors Need To Do
Australia’s Reserve Bank has likewise reported strengths in the economy, when announcing in November that it would hold cash rates steady at 1.5%. Growth forecasts for 2018 and 2019 were revised up, GDP is at a six year high and both inflation and unemployment are down.
For the savvy investor, a volatile market can be fertile ground for portfolio enhancement. A calm, considered assessment of a falling market can open opportunities for getting into stocks with potential over the longer term at a lower cost than usual.
Caution is never a bad approach to a volatile market, but a fearful flight response could see investors jettisoning stocks from their portfolio that might be better held onto while they ride out the fall.
If you would like to speak with a professional investment adviser about how your portfolio is positioned for the year ahead, contact United Global Capital today on 03 8657 7640 or email [email protected] for a no cost, no obligation consultation.