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By: Sam Instone

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November 21st, 2018

If you’re panicking about the markets, STOP and read this

Financial Planning | Investment

No one likes losing.

(Especially losing money).

In fact, science says we feel a loss more deeply…

Than we do a gain.

Do you agree?

Nearly 40 years ago…

Amos Tversky and Daniel Kahneman came up with a theory.

It became one of the founding principles of behavioural finance.

They observed that most people don’t like losing…

And tend to focus more on losses than victories.

This behavioural bias is known as loss aversion.

And investors may be experiencing it now more than ever…

Given the current state of the market. 

Pain From Loss Behaviour Gap

So how can investors overcome this

Or at least deal with it…

To avoid their emotions driving their decisions?

Block out the noise

A few days ago, MoneyWeek’s headline read:

“The world’s most important stocks are now in a bear market”

Granted, investors felt panic…

As FAANG stocks plummeted at least 20%...

That’s Facebook, Apple, Amazon, Netflix and Google…

All the tech giants toppled down.

Just a few months ago Apple became the world’s first $1 trillion company.

Amazon quickly followed suit.

Yet today, there are no trillion-dollar companies.

Manage the emotions of investing

When it comes to money…

Your happiness and sadness are often driven by the movement of the markets.

When the markets are higher, you’re feeling good.

When the markets are low, you’re miserable.

That’s the emotional cycle.

Dimensional Emotional Cycle

The trouble is, people often do something about this.

When markets rise, investors buy into equities in volume.

And as markets fall, they sell aggressively.

This cycle is repeated as markets ebb and flow…

Buying high and selling low…

Which is not at all a viable way to create wealth.

In fact, it’s a system of wealth destruction.

Your financial planner should reframe this way of thinking completely.

It’s not just about time and markets

But focussing on your goals…

And the direction towards it.

Your wealth growing over time.

Dimensional Direction to Goals

Any investor knows that, inevitably, the markets will go up and down.

Which means you’ll be happy at some points…

And worried at others.

Yet if you had to really look at things carefully…

You may realise you’re wealthier now than you were back then.

The MOST important advice you’ll hear today

While there are many reasons to feel despondent about the markets…

The most important thing is to stay disciplined.

While you may be feeling a sense of loss…

You can remedy this by staying invested.

The loss only becomes reality if you sell.

I’ve said this before, the market is undeniably resilient.

Between 2007 and 2009, the great market crash occurred.

By the end of 2009…

The DOW, S&P 500 and NASDAQ all made a remarkable recovery…

Investors who sold at the bottom, were soon living to regret it.

And asking themselves the painful question:

“What if we had simply stayed put?”

Crash Recovery Time

At the end of the day, we can’t avoid loss aversion entirely.

We also can’t control the markets.

But we can understand how the world of investing works…

And how fluctuations may drive irrational decision making.

After all, investing is not a cat-and-mouse game between you and the markets.

It’s about sound judgment, discipline and focus

And keeping your eye on the bigger picture.

So whether the bear market’s already happening or starts a year from now…

Stop panicking.

Like everything else in life, things come to an end.

These market lows will too.

Chat to us if you’re looking for a financial planner to ride out the storms with.

Book a 15-minute discovery call

About Sam Instone

Sam Instone, Director at AES International, is passionate about positive change and ensuring international investors get better results.

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