For people who have never invested before or don’t know much about investing, the very idea can seem scary. Throw in frightful jargon like “zombie” companies (firms that can only just afford to pay the interest on their debt) and “FAANGs” (an acronym for the biggest US tech firms: Facebook, Apple, Amazon, Netflix and Google) and you have the makings of a Halloween story.
It’s natural to fear things we don’t understand, and history is littered with examples. Think of the dread that gripped us before we knew about germs, a time when wicked witches were the only desperate explanation we had for fits and diseases.
Although witch trials are a thing of the past and science has explained many ‘spooky’ phenomena, the world of investing still casts a strange spell. It can baffle even the ’experts’. But there’s usually a rational explanation.
Our own worst nightmare
It’s well known in the finance industry that short-term market movements don’t always reflect the underlying value of an investment. Prices can be affected by ‘animal spirits’, a term used to describe the emotions that influence investor behaviour. Investors are human after all, and are at risk of making bad decisions - decisions not based on a cold analysis of the facts, but driven by emotions and biases. Although not supernatural, these forces can be very powerful, often leading to major investing mistakes that you can avoid.
Whilst these behaviours are now well studied and understood, investors are still making predictable mistakes. One example is our desire for safety in numbers, leading us to invest in something simply because others are doing the same. This is known as ‘herding’.
Much of the fear associated with investing is based on what we see in the daily news cycle: the short-term behaviour of stocks and shares, which can seem as perilous as a spin of the roulette wheel. Past performance is not a guarantee of future results, which are logically uncertain, but if you look at the return of the FTSE 100 every day over the past 20 years, you would see a gain on 52% of the days, so it was basically a coin toss. To add to the nightmare, the media love a scare story, so the FTSE only tends to make the headlines when it’s a blood bath.
However, if we look at the FTSE 100 returns over all 5-year periods again in the last 20 years,, the chance of a gain goes up to 75%, and if you’d held on for 10 years – a proper long term horizon – it goes all the way up to 86%. Whilst we must not forget that what happened in the past may not happen in the same way again, this is a much rosier prospect than the daily coin toss.
Conquering your demons
You should not invest if you need access to your money within the next 5 years. And this way you will have a secret weapon: you will have time on your side. Try to avoid being frightened into making decisions based on the scary short-term. Judge your investments over periods that match your own objectives, rather than how they happened to performed this week.
Tune out the noise. It’s unlikely that today’s news will have as much effect on your investments over the long-term as you might think.
Just as the fear of the dark is triggered by what you think might be lurking in the shadows, don’t let your imagination run wild and turn your investing experience into the plot of a Hollywood horror film.