The “Coronacrash” is history. The crisis, subsequent fiscal and monetary policy stimulus and vaccines have made the past year one of the most profitable and easiest to invest in. It was very difficult for anyone to not make money. And unfortunately, when things get easy, we get lazy and complacent.
First – A Bit About Those Who Sold in 2020
The pullback last March was significant and it was fast. It caused many to sell, as evidenced by all the selling, and several investors are probably still in cash. Many of those are probably still awaiting a pullback from the torrid recovery we have been in since late March 2020. That’s the thing about selling. No one tells you when it is bottom and it’s OK to get in.
Isn’t that a shame? Some well-meaning, but undisciplined, investors missed out on what may have been the best and easiest stock market we have ever had. Jason Zweig reports that as of March 23, 2021, 94% of stocks in the Wilshire 5000 had a positive return over the last 12 months. You would have to have been very unlucky (or undisciplined) to have not made money this last year.
There are several financial firms that estimate the cost of poor decision making. Vanguard, Dalbar, Inc, Morningstar, JP Morgan to name a few. It is opined that emotional investing can cost you 1.5% – 3.0% per year. But that is just an average. Those that sold in March of 2020 and are still in cash have hurt their portfolios so much that they may need to lower their goals or extend their time horizon. Averages can mask exactly how much damage we can do to ourselves. And they did it during one of the best markets ever! That is where behavioral coaching (done effectively) can be worth much more than a few percent per year.
Complacency is a Natural Outcome
The Fed’s reassurance of low interest rates, policymakers cutting checks left and right and very effective vaccines have created significant tailwinds for the economy. Growth has been robust and is expected to continue as more individuals get vaccinated the rates of infection drop to manageable endemic amounts. This has been confirmed by broad appreciation across equities, housing and cryptocurrencies (even fake ones). In other words – times are good right now.
There is some concern about inflation and most reasonable people recognize at some point these tailwinds will dissipate and year-over-year growth may not look to good as the economy normalizes and reverts to the mean. But so long as the markets keep going higher, many of us will choose not to get too concerned. This is because one of the most powerful biases that influences investor decisions is that of the outcome bias. When outcomes are good, we feel good (cue the dopamine) and don’t want anyone to take the punch bowl away. We just let things go; we get complacent. It’s a natural and human response.
Challenge of Complacency
Complacency is a nice state of being – for a little while. It is like a plateau, but we shouldn’t get too comfortable. Complacency can cause us to become lazy and desensitized to regular life. It can cause us to underestimate risk because times are good – so there isn’t risk, right? When it comes to the stock market that means that a little bit of volatility, when unexpected, could wreak havoc on our emotions and ultimate decisions. What got us anxious and jittery before (i.e. a 30% move) could happen with a much smaller move.
As much as we don’t like stress, we need it. Stress helps us regulate our lives and stay sharp. Stress in the markets helps us better understand its volatile nature, and we become less likely to be influenced by the whims of the markets. And isn’t that what we could all use to help us make more disciplined, profitable decisions?
So what do we do if we feel ourselves (or a client) becoming complacent? The first is to help the individual recognize it is present and how it influences us. The ways it is desirable (allows us to breathe) and how staying in a complacent state too long can cost us in the long run.
When it comes to investing, reviewing the plan and past history when times went from good to bad can be helpful. Not that we want to instill fear, rather a dose of reality. And then we can discuss what is possible for the future – including the possibility that market goes down 20%+, and talk about what the client wants to do when their portfolio goes from $1 million to $800k. Those discussions are best had during the good times anyway – that way cooler heads are prevailing which allows for rational thought.
Related: Perception Is Greater Than the Truth