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Waterfall news

ACTinG RATiOnALLy in

iRRATiOnAL mARKETs

By Henko Roos, Head of Manager Research at PSG Wealth

“Your success in investing will depend in part

on your character and guts, and in part on your

ability to realise at the height of ebullience and

the depth of despair alike, that this too shall

pass.” – Jack Bogle

i nvestors face extraordinary times as the COVID-19 pandemic Recent research by Fidelity Investments shows that during

has put the brakes on global economic growth, leading
the past 35-years, the us stock market has experienced
to a rapid increase in market volatility. The uncertainty
created by this event has caused a significant decrease in an average drop of 14%, from high to low, during each
calendar year. still, this index enjoyed a positive annual

investor sentiment, resulting in large drawdowns in financial return in more than 80% of the calendar years over this
markets across the world, through most asset classes. period. With downturns occurring so frequently, investors
need to keep perspective and focus on the bigger picture.
We know that major behavioural biases emerge during
a market crisis. Herd behaviour, otherwise known as the Make sure your portfolio and investments are
‘bandwagon effect’, is a good example. This is when most structured to suit your risk appetite and investment

people decide to buy or sell similar assets during a crisis. horizon. This, combined with realistic investment
goals, can drastically reduce short-term panic and
According to behavioural expert, Alexis Bienvenu, this uncertainty during market setbacks. Also, be wary
behaviour is partly rational: it is based on the fact that the of being too conservative. Conservative strategies
first to sell an asset gets a better price. As a consequence, may not provide the desired growth potential you

everyone intends to be the first to sell during a correction, need to achieve your goals in the long-term.

as if they were racing against each other. If trying to be

the first to sell is rational, there still comes a point when Data reflects that investors who held on to their assets
rationality risks being overshadowed by an irrational bias. through a global financial crisis, for example, were
When fear and panic come into play, investors forget about ultimately rewarded. But hindsight is 20/20 and while we
the long-term and fair prices and only focus on selling. are in the midst of a unique event such as COVID-19, it
is difficult to identify when sentiment will improve and
Allowing this fear and panic to drive decisions is a when the current market downturn will fully recover.

sure-fire way to underperform the market. As Warren

Buffet rightly says: “The stock market is a device to It is one thing to acknowledge the dangers of your
transfer money from the impatient to the patient.” emotions to your investment portfolio; it is altogether Nothing like your grandad’s Volvo.
another challenge to keep your emotions in check and
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