I was sitting this weekend talking with someone who has spent the first few months of the year traveling and enjoying life. They were basically staying “off the grid”. He takes a look at my copy of the Wall Street Journal and sees the S&P 500 was up a little over a percent for the first quarter and says to me, “Looks like you had a pretty dull quarter”. I replied, “Yup, you had a lot more fun enjoying life these last three months than my dull time.” Boy, how different that conversation was from those in February. If only more people could stay “off the grid”, put the blinders on and just enjoy life. How much better off would they be mentally and financially right now?
We are fortunate to live in this information age were the world we live in has changed so dramatically from the world we grew up in. The information and connectivity that is at our finger tips is that of our childhood science fiction stories. Some would say it has made our lives so much better; however some could make an argument that it’s made it worse. For this man, staying away from all the outlets that would have told him that the S&P 500 had dropped over 10% by mid-February, allowed him to enjoy his life and probably kept him from making investment decisions based on fear! Unfortunately, most investors were too aware of what was going on and many people took their money out of the market around this time. To make it worse, that money is still sitting on the sidelines watching the market rebound. Those are the people that truly lost money and are getting angrier because they are still losing money waiting for the golden opportunity to get back in again now that the market has rebounded.
With today’s glut of information at our finger tips, (both the good and bad) , it makes it hard for the average investor to decipher. They think they are making these rational decisions by following all these opinions they hear and they end up following the herd. Unfortunately, by the time you react to the negative information, possibly by exiting an investment, most of the negative impact has already hit your portfolio. Then by the time you decide to react to the positive information and get back into the investment, most of the positive benefit has passed you by. Conversely, if you would have just stood still you would have ended up better off. This is a concept that Behavioral Finance professionals call ”Herding,” when your rational mind follows where the mass of media and opinions are guiding you. You think that so many others are doing this same thing and you have to follow along. It is irrational to think the market is going to come back, even though history has shown, it always does.
As investors today we are still scared by the Great Recession of 2009. We saw those lines on the stock charts drop in dramatic fashion with volatility above the historical normal. However, what is making it worse now is we have been in a long period of abnormally low volatility and it has made our brains think this is “normal”. Anything beyond this new “normal” brings us back to this scary time in 2008/2009, affecting our rational decision making. See, the 30 plus year historical normal volatility in the S&P 500 is just over 15%. During the Great Recession of 2009, and the start of the rocky recovery, that only moved above the normal by 2% points, to just over 17%. However, it is all the other bad that was going on during that time that leaves that mental scare. Now this recent period of “ab-normal” market conditions over the last five years has seen that average volatility drop to around 12%, then to 11% for the four year period, then down as low as 9% over the last three years. This long period of time with such low volatility has allowed us forget what “normal” actually is; unfortunately, we still remember those other scary moments.
Now over this last year and a half we have seen that average volatility come back to just below those “old” normal levels to about 14%. Back in February I heard people say “I can’t handle all this market volatility. I’m losing money and I just have to get out.” Then they followed the herd right out of the markets. I wonder how these lifelong investors handled it just 10 years ago when this level was the normal during a time when we would see market corrections every couple of years as well. People have mentally blocked out the past in order to heal from 2009. Unfortunately in doing so they have screwed up their perception of what “normal” really is leading them to making bad investment decisions that hurt one’s ability to reach their long-term financial goals. Maybe it is time for more investors to “go off the grid” for a while to give their portfolios a chance to recover and perform the way it was intended it to. By the way, that gentleman I was speaking to was getting ready to enjoy a nice spring day and take his grand kids to the baseball game. Sounds like a good time.