John Astrup,Investment Product Manager

Falling equity markets and the beautiful game

2018 was a tough year for investors, the worst year since the global financial crisis. So how do we feel about this and the subsequent reminders we have experienced more recently in 2019? Well – worried in a word. John Astrup, Investment Expert at Zurich Middle East talks about what investors can apply today from this summer’s FIFA Women’s world cup?

Investing and prospect theory

The easy availability of financial news (especially the scary kind) paired with the human tendency to overweight danger means that many investors worry and even panic at times of market volatility. Falling equity markets heighten emotion around the reducing paper value of our investments. The theoretical basis of this is prospect theory. Prospect theory, looks at how you and I make choices between different options or prospects – a key part of this is that we all tend to give losses more weight than gains, we are loss averse.

Quick example for you, so, if you gain $100 and lose $80, you’ll tend to focus on how much you lost, not on how much you gained, even though you came out $20 ahead. Focusing on the downside quite frankly stresses us out and puts us under duress.

The pressure is on

For you football fans let’s consider investor behaviour mirrors that of a football goal keeper facing a penalty shoot-out. So let’s say it’s USA v Germany and Germany need to score the next penalty to win the match. You are the United States goalkeeper – Alyssa Naeher and have the nation’s hopes resting on your shoulders as the top ranked team at the World Cup.

You have three options as the goalkeeper, you can stay centre of the goal, you can dive to your right, or to your left. What do you do? A study found that in a penalty shootout, shots were divided almost equally between the middle, left and right of a goal. So how did goal keepers react? Were their efforts also divided equally?

In actual fact, goal keepers dove either to the right or the left 94% of the time. "Whether it's football or investing, we have a natural tendency to want to say that we did everything we could to get the best results. However, often you can get the best investing results by staying put".

Time in the market, not ‘timing the market’

Nobel Prize winner William Sharpe - father of the Sharpe ratio - found that investors trying to 'time the market’ (selling at the top of a market peak and buying again at the bottom of a market trough) needed to get their timing right 82% of the time to get a return equivalent to an investor who bought and did nothing.

William Sharpe also found that the vast majority of positive returns occurred in a small window of time so those investors trying to time the market were highly likely to avoid the good times as well as the bad.

So our top investing tip - never underestimate the power of doing nothing. This however goes against our ingrained human behaviour to fix things by taking action. We are taught from young that for every endeavour in life, more effort means more results. If you are trying to lose weight, you need to exercise more, if you want to learn more you need to read more books. But if you want to make more money as an investor - you should do less!

While this feels counter intuitive, history has shown that the best investors do just this. In fact, a Fidelity study in the US contacted all of their top investors to hear all about their secret investment techniques. When they reached out, they discovered these high performing investors had completely forgotten about their Fidelity accounts.

Investing is the easy part. The hard part is controlling our day to day behaviour. A financial professional can be both your behavioural coach and your asset manager. Start your journey towards a successful advice relationship with our handy guide.

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