I wrote this article at the end of October 2018 when the markets were volatile to say the least. Recency bias is a fancy term that means we assume that because something has been that way recently, it will continue to be that way.
However, Shark Tank’s Kevin O’Leary correctly argues that for the last few years, the market has been less volatile so young people “are not used to major corrections, and so now we’re starting to get them,” he says. “These are normal phenomena.”
You must think long term. We totally agree. Markets will go up and markets will go down. But, over the long term, markets tend to go up. For example, the S&P 500 has averaged 9.8 percent over the past 90 years.
There is an amazing quote often attributed to Warren Buffet, but is actually from his professor and long-time friend, Benjamin Graham:
“In the short run, the market is a voting machine but in the long run it’s a weighing machine.”
Graham was cautioning us not to follow market fads. In the short run, the market is like a popularity contest. Stock prices rise and fall, but the underlying value of the company doesn’t change. But in the long run, the market does revert to the mean, or in other words, back to the numbers.
Market volatility can be scary for a lot of people, but if you are concerned, you should meet with your financial advisor. Together, you should review your plan. Are you still on target to your goal? Has anything major changed in your life, (new job, marriage, divorce, baby)?
We believe that in the balance of 2018 and into 2019 we will see a return of volatility. This isn’t necessarily a bad thing, we just need to be prepared. However, if you are retiring soon, or you have a shortened time span than originally planned, it’s a good time to re-evaluate how much risk you’re prepared to accept.
Psychologist Daniel Kahneman coined the phrase “loss aversion,” which, in a nut shell, means that the pain of losing is more pronounced than the joy of winning. This trick of psychology can be very detrimental to investing. Don’t get emotional about investing. Being emotional gets in the way of making logical decisions about our money.
We may very well be entering a major correcting in the market. There is an old saying that goes, “Bulls make money, bears make money, pigs get slaughtered.” Don’t get slaughtered. Meet with a qualifies advisor today.
This article is part of a monthly series of investment and insurance advice featured in Hespeler Village Magazine. The write of these articles, David Reeve, is President of Davlyn Financial a local, award-winning financial planning firm in Cambridge.