Investment Focus | Issue 1

The closing months of 2018 were a classic example of behavioral science in action. The concept of “Loss Aversion” tells us that we have a tendency to prefer avoiding a…...
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April 16, 2019
by Dan Lambert

The Difference a Few Months Can Make

The closing months of 2018 were a classic example of behavioral science in action. The concept of “Loss Aversion” tells us that we have a tendency to prefer avoiding a loss to acquiring an equivalent gain. For example, most people prefer not to lose $5 than to find $5. This trait comes in handy with our fight-or-flight response if we happen to meet a wild animal in the woods.

However, when it comes to the equity market and our right brain (the emotional side) is telling us to “get out” whenever things go the wrong, this can be damaging to our financial health. This is why having a solid investment plan and sticking to it through thick and thin, is the best way to go for long-term investors.

When the markets decline 5%, we pretend not to notice. When it falls 10%, we get somewhat nervous but explain it away as a “healthy correction”. But when that 10% turns into a 20% drop or larger and the news headlines are blaringly negative, it’s in our nature to want to sell when we should probably be considering the opposite

I mention this because that’s exactly what happened at the end of 2018 as world markets turned negative and had the worst December on record. As our President, Rick Tomalty, mentioned in his January post (Investors Behaving Badly), 2018 was a challenging year for investors as almost all major stock markets declined. This, along with the negative news cycle, caused a record number of investors to sell $83 billion worth of equity funds and ETFs in December of 2018 (according to data from EPFR Global).

Fear-Greed Cycle - by Behaviour GapHowever, what a difference a few months can make! Contrast the negatives in 2018 to the end of the first quarter of 2019 with many markets having fully recouped their 2018 losses. For those that sold in December last year, they unfortunately locked in $83 billion of losses. This is an ill-fated example of how market timing can cause many investors to under-perform indices over time.

This is a great example as to why investors need to look past short-term volatility and alarming headlines. We helped our clients do just that as we saw no panic selling during this challenging period.

The Year Ahead

With the Federal Reserve in the US and the Bank of Canada both indicating they are halting rate hikes, there should be a sigh of relief for the economy and likely fixed bond funds (as bond prices go down as interest rates go up – making your bond funds lose value). As for the equity markets, most analysts are of the opinion that 2019 will be a positive year for the markets due to 3 reasons:

1. The decline in earnings estimates for 2019 seems to be stabilizing;
2. As mentioned above, the Federal Reserve in the US is holding rates for at least the next six months;
3. China is finally moving to reflate its economy.

However, no one can predict short-term market movements with any degree of accuracy. As Warren Buffett said, “The only value of stock forecasters is to make fortune tellers look good.” Whether the next quarter or the rest of the year ends up positive, only time will tell. Our job is to make sure you stay on track with your investment goals and are not sidetracked by short term volatility.

First Quarter Returns

Investments table for Issue 01

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