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Investment Market Crash Imminent!

Mar 30, 2023 | Financial Planning, General | 1 comment

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You are probably already scanning the text of this article for details on the crash and when it is expected.

Your thoughts are probably jumping to what action to take next regarding your investments. Sell your shares or move your equity unit trusts into safer money market accounts?

BUT…this headline is NOT true, it was written to illustrate two points that happen to us all daily:

  • Pessimism can be seductive; and
  • We are influenced by the agendas of others.

Isn’t it amazing how pessimism is so much more powerful in our lives than the feeling of potential and hope?

Most people are a little apprehensive before they invest, but nevertheless excited and hopeful about the potential of their investments doing well.  Once invested, their senses are naturally heightened to any bad news.

Are we being manipulated? 

The answer is yes…. if we allow ourselves to be influenced by the agenda of others!

We are all attracted to attention-grabbing articles and we cannot help but click on the most dramatic of headlines.

We are  bombarded daily with news articles on impending recessions, market crashes, hyperinflation and job losses in the media.

Politicians such as Donald Trump, Boris Johnson, Liz Truss and Julius Malema engage in grandstanding to get media coverage as they search for attention for their agendas through website clicks in the media.

On top of that, social media constantly feeds pessimism and if you click on one bad news article, you will most likely be fed predominantly bad news for the rest of the day based on your initial click.

Politicians, market commentators and media companies all have their own roles and agendas, but that does not mean you should allow yourself to be influenced and make the wrong decision with your investments.

Avoid the Pessimism Trap  

When humans feel uncomfortable after a global event, we often feel the need to take action.

This  automatic reaction is akin to the primal response that our hunting ancestors felt when faced with threats of attack from other tribes and wild animals.

It may also be the reason that once we commit money to an investment, we end up with a similar tense feeling.

But this need to act — when faced with bad news headlines of recessions and market crashes — is often the most dangerous thing you can do.

In the words of Daniel Kahneman, who won a Nobel prize for his work in behavioural economics: “Pessimism is seductive when it comes to money”.

He also proved that humans are about three times more unhappy about investment losses than they are happy about equivalent gains, because “losses loom larger than gains”.  This results in loss aversion bias — the tendency for investors to strongly prefer avoiding making losses to making gains.

Think about this: It means we are three times more emotional on the down side!

The Secret to Riding Out Market Dips

It is impossible to time the markets — to try to choose the best time to invest and when to disinvest due to market crash concerns. Research has shown time and again that investors lose substantially more money than they make with this approach.

Even the best asset managers in the world do not know where markets will move in the short term, but they have a sense of what may happen over a 5-to-10-year period based on professional research and observation of market trends.

Active asset managers will buy and sell shares in the portfolios they manage if they have concerns about the performance of those assets or if they think the assets will offer good returns.

To protect your investments, Veritas financial advisers make use of diversified portfolios, across asset classes, countries, currencies and industries, the objective being to limit your losses during  market downturns. Veritas also diversifies client portfolios across investment styles and fund managers, who compete against each other within those portfolios. This reduces overall risk by avoiding concentrated exposure (too many eggs in one basket), such as one would find in a traditional share portfolio, for example.

Veritas keeps an eye on longer term cyclical changes taking place in markets and, in consultation with the fund managers, makes the necessary adjustments on your behalf.

Having a well diversified investment portfolio and allowing your asset managers and financial adviser to do their jobs is what will allow you to sleep peacefully through market dips.

Pessimism is a long term loser

The problem with pessimism is that it does not serve you well in markets.

You are much better off staying invested and making small adjustments that will incrementally add a little more value over time.

If you have a well-diversified investment portfolio then you do not need to panic about all the bad news.  In the words of Nobel Prize laureate Harry Markowitz, “diversification is the only free lunch” in investing.

It is the calm optimist who will end up with a much better return in the medium to long term.

It would seem that pessimism and money seem to have a supercharged relationship, according to Morgan Housel in the book The Psychology of Money.

This shows that we need to be cautious not to get caught up in the negative media articles and grandstanding of politicians.


1 Comment

  1. Dion Evert

    Very well summed up and cool advice


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