Francisco Gomez Pastrana Alva
โญ๏ธ๐˜ฝ๐™€๐™ƒ๐˜ผ๐™‘๐™„๐™Š๐™๐™๐˜ผ๐™‡ ๐™€๐˜พ๐™Š๐™‰๐™Š๐™ˆ๐™„๐˜พ๐™Ž ๐˜ผ๐™‰๐˜ฟ ๐™๐™„๐™‰๐˜ผ๐™‰๐˜พ๐™€: ๐™’๐™ƒ๐™” ๐™„๐™‰๐™‘๐™€๐™Ž๐™๐™Š๐™๐™Ž ๐˜พ๐™Š๐™Ž๐™ ๐™๐™ƒ๐™€๐™ˆ๐™Ž๐™€๐™‡๐™‘๐™€๐™Ž ๐™ˆ๐™Š๐™‰๐™€๐™”.โญ๏ธ โœ… Due to the volatility over last month, many investors are selling off. ๐Ÿ’กI find it as a great opportunity to talk once again about Behavioural Finance, one of the most important (and my favorites) fields in Investments and Finance. ๐Ÿ“ŒPeter Lynch was one of the greatest investors in history. He managed the Fidelity Magellan Fund for nearly 30 years obtaining an incredible annual return of 29%. โš ๏ธ Yet, according to data provided by Fidelity, the average investor in the fund lost money over that period. ๐™ƒ๐™ค๐™ฌ ๐™ž๐™จ ๐™ฉ๐™๐™–๐™ฉ ๐™ฅ๐™ค๐™จ๐™จ๐™ž๐™—๐™ก๐™š? ๐Ÿง  The explanation relies on the behavior of the investors. Even though the fund achieved outstanding returns over the years, investors took poor investment decisions that made them lose money: they joined the fund after the best performing years, buying very expensive and left the following year, when the performance was not that great as the previous, locking up loses. โœ… Had they stayed in the fund for a longer period (focusing on the long term), they would have obtained the nearly 30% yearly return the fund got. ๐™„๐™จ ๐™ž๐™ฉ ๐™– ๐™œ๐™ค๐™ค๐™™ ๐™ž๐™™๐™š๐™– ๐™ฉ๐™ค ๐™ฉ๐™ง๐™ฎ ๐™ฉ๐™ค ๐™ฉ๐™ž๐™ข๐™š ๐™ฉ๐™๐™š ๐™ข๐™–๐™ง๐™ ๐™š๐™ฉ? ๐Ÿ’๐Ÿปโ€โ™‚๏ธ Market timing is defined as trying to anticipate market movements to buy at the lowest point and sell at the highest, maximizing returns. โš ๏ธAs good as it might sound, investors who try to time the market most times end up losing money or underperforming the market, as has been seen in the Fidelity Fund example. โ“Why? ๐Ÿ“Œ ๐™€๐™–๐™จ๐™ฎ: ๐™ฉ๐™ž๐™ข๐™ž๐™ฃ๐™œ ๐™ฉ๐™๐™š ๐™ข๐™–๐™ง๐™ ๐™š๐™ฉ ๐™ž๐™จ ๐™ฃ๐™ค๐™ฉ ๐™ฅ๐™ค๐™จ๐™จ๐™ž๐™—๐™ก๐™š, ๐™–๐™ฉ ๐™ก๐™š๐™–๐™จ๐™ฉ ๐™ฃ๐™ค๐™ฉ ๐™˜๐™ค๐™ฃ๐™จ๐™ž๐™จ๐™ฉ๐™š๐™ฃ๐™ฉ๐™ก๐™ฎ ๐™ž๐™ฃ ๐™ฉ๐™๐™š ๐™ก๐™ค๐™ฃ๐™œ ๐™ฉ๐™š๐™ง๐™ข. ๐Ÿ”™ The well-known investment research firm Morningstar measured the cost of market timing in his report โ€œFundamental for Investors (2018)โ€. โญ๏ธ It concluded that an investor that had missed the best 10 days of the market between 1997 and 2017 would have underperformed the market by half. ๐Ÿ“Œ According to Morningstar, ๐™ฉ๐™ค ๐™—๐™š๐™–๐™ฉ ๐™ฉ๐™๐™š ๐™Ž&๐™‹๐Ÿฑ๐Ÿฌ๐Ÿฌ ๐™ž๐™ฃ๐™™๐™š๐™ญ, ๐™–๐™ฃ ๐™ž๐™ฃ๐™ซ๐™š๐™จ๐™ฉ๐™ค๐™ง ๐™ฌ๐™ค๐™ช๐™ก๐™™ ๐™ฃ๐™š๐™š๐™™ ๐™ฉ๐™ค ๐™ข๐™–๐™ ๐™š ๐™ฉ๐™๐™š ๐™ง๐™ž๐™œ๐™๐™ฉ ๐™˜๐™–๐™ก๐™ก ๐™ค๐™ฃ ๐™ฉ๐™๐™š ๐™ข๐™–๐™ง๐™ ๐™š๐™ฉโ€™๐™จ ๐™™๐™ž๐™ง๐™š๐™˜๐™ฉ๐™ž๐™ค๐™ฃ ๐™ฉ๐™ฌ๐™ค ๐™ค๐™ช๐™ฉ ๐™ค๐™› ๐™ฉ๐™๐™ง๐™š๐™š ๐™ฉ๐™ž๐™ข๐™š๐™จ! Crazy, isnโ€™t it? โ“If the numbers and statistics are so clear, why do investors keep taking wrong investment decisions? ๐Ÿง  The answer relies on the Behavioural Finance field and is explained by the so-called heuristics and other popular concepts like: โœ…Herd Behavior: people tend to replicate the movements and investment decisions of the majority, similar to a herd. โœ…Emotional gaps: some irrational choices are caused by extreme emotions or feelings: anxiety, anger, excitementโ€ฆ โœ…Anchoring: people tend to base their decisions on reference points that are arbitrarily chosen. โœ…Self - attribution or overconfidence in oneโ€™s own knowledge or skill. The concepts lead to the so-called ๐™—๐™ž๐™–๐™จ๐™š๐™จ: 1๏ธโƒฃ๐˜พ๐™ค๐™ฃ๐™›๐™ž๐™ง๐™ข๐™–๐™ฉ๐™ž๐™ค๐™ฃ ๐™—๐™ž๐™–๐™จ: investors tend to look up and take as right information that confirms what they believe rather than information to contrast it. 2๏ธโƒฃ๐™‡๐™ค๐™จ๐™จ ๐˜ผ๐™ซ๐™š๐™ง๐™จ๐™ž๐™ค๐™ฃ: investors place more weight on the concern of losses than the pleasure from market gains. It is estimated that the pain of losing $1 is equivalent to the pleasure of a $2 - $2.5 gain. 3๏ธโƒฃ๐™๐™–๐™ข๐™ž๐™ก๐™ž๐™–๐™ง๐™ž๐™ฉ๐™ฎ ๐˜ฝ๐™ž๐™–๐™จ: investors tend to invest in what they know. For example, domestic companies rather than international stocks. 4๏ธโƒฃ ๐™€๐™ญ๐™ฅ๐™š๐™ง๐™ž๐™š๐™ฃ๐™ฉ๐™ž๐™–๐™ก ๐˜ฝ๐™ž๐™–๐™จ: Investors tend to think that events that have occurred in the past are likely to happen again. โ“ What can investors do to avoid biases and bad investment decisions caused by behavior? 1๏ธโƒฃ๐˜ฟ๐™ค ๐™ฃ๐™ค๐™ฉ ๐™ก๐™ž๐™จ๐™ฉ๐™š๐™ฃ ๐™ฉ๐™ค ๐™ฉ๐™๐™š ๐™ฃ๐™ค๐™ž๐™จ๐™š: News, other investors, celebritiesโ€ฆ Loads and loads of new information are released each day and will likely cause you to make wrong investment decisions. Avoid the noise and only look up quality and objective information. Do not make decisions right after reading a piece of news, take your time to think and go over it. 2๏ธโƒฃ๐™ƒ๐™–๐™ซ๐™š ๐™– ๐™ฅ๐™ก๐™–๐™ฃ ๐™–๐™ฃ๐™™ ๐™จ๐™ฉ๐™ž๐™˜๐™  ๐™ฉ๐™ค ๐™ž๐™ฉ: you need to have a CLEAR INVESTMENT STRATEGY. This is a very important point because when hard times come you need to remind yourself what is your strategy, why is a good strategy, and stick to it. ๐Ÿ“ŒIn the QualityDividendPortfolio we have a CLEAR STRATEGY and we stick to the plan in good and bad times. Running out when there is a correction is POOR INVESTMENT DECISION ๐™‹๐™ก๐™š๐™–๐™จ๐™š, ๐™—๐™š ๐™ฅ๐™–๐™ฉ๐™ž๐™š๐™ฃ๐™ฉ, ๐™›๐™ค๐™˜๐™ช๐™จ ๐™ค๐™ฃ ๐™ฉ๐™๐™š ๐™ก๐™ค๐™ฃ๐™œ ๐™ฉ๐™š๐™ง๐™ข, ๐™จ๐™ฉ๐™ž๐™˜๐™  ๐™ฉ๐™ค ๐™ฉ๐™๐™š ๐™จ๐™ฉ๐™ง๐™–๐™ฉ๐™š๐™œ๐™ฎ. Remember what Warren Buffet said: โ€œThe Stock Market is a device for transferring money from the impatient to the patientโ€ $SPX500 (SPX500 Index (Non Expiry)) $EUSTX50 (EUSTX50 Index (Non Expiry)) $VTI (Vanguard Total Stock Market ETF) $UVXY (ProShares Ultra VIX Short-Term Futures ETF)
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