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Right, listen up, it’s time to address the ‘big, bad’ volatility issue in the room

By Sam Instone - February 06, 2019

As a campaigner for positive change in global investing…

I make it my mission to follow those advocating for the same.

Robin Powell is a financial journalist whose sentiments so often reflect my own.

His recent piece on market volatility (and why it shouldn’t affect focus) is particularly share-worthy.

Here’s what he had to say.

“As much as I try to encourage investors not to be unnerved by it…I realise that stock market volatility can be very hard to ignore. Global markets have been on a rollercoaster ride for the last few weeks…And it’s only human, particular for those nearing retirement, to feel a little anxious”. 

Focus on what's important

It’s the best advice at times like these.

For those with a financial plan and strategy matching their capacity for risk…

The questions to ask are these:

  1. Have the recent market falls jeopardised my plan?
  2. Have circumstances changed sufficiently to warrant reviewing my plan?

The answer to both of those questions should be a resounding No.

The fact that markets are lower than they were a little while ago shouldn’t affect your plan at all.

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The Focusing Illusion

The problem with market volatility is that it tends to divert our focus.

So we land up focusing on the wrong things.

In his book Thinking, Fast and Slow

The Nobel Prize-winning behavioural scientist Daniel Kahneman describes what’s known as the Focusing Illusion.

It holds that:

“Nothing in life is as important as you think it is while you are thinking about it”.

When you’re thinking about falling markets, the uncertainty surrounding Brexit, the strains in US-China trade relations, etc. they all seem very important.

If, instead, you focus your mind on your long-term financial plan

(Which should be designed to withstand just these sorts of episodes)…

You’ll have a much healthier sense of perspective.

Again, we know it’s easier said than done…

(Especially with all the scary headlines we’re seeing at the moment).

But times like these will pass; they always do.

A few years, or months, from now, you’ll probably wonder why you were so anxious.

(That’s if you haven’t forgotten about it altogether). 

Availability bias

Fortuitously, the latest part of Your Own Worst Enemy

(Powell’s video series on investor behaviour)…

Tackles this very tendency to base decisions on what seems most important right now…

Instead of on likely long-term outcomes.

Behavioural scientists call it availability bias, of which there are different types.

One example is salience, or the way we allow major events to cloud our judgement.

Some investors, sadly, never get over losing money in major market downturns.

The Wall Street crash of 1929, for instance, is still ingrained in people’s consciousness…

(And yet most of us weren’t even alive at the time).

But the most common type of availability bias is recency — in other words, giving greater weight to recent information than the long-term evidence warrants.

It is, of course, perfectly natural to be heavily influenced by recent events.

When we perceive those events as negative, they loom larger still.

In the great scheme of things, however, volatility and market downturns are not really negative at all…

They’re part of investing.

More than that, they’re actually the reason why there’s an equity premium at all...

If you’re feeling anxious at all about the markets, chat to us.

We can help put your mind at ease by looking at your current investment…

And seeing if it’s working for you.

Time for a second opinion