We live in uncertain times, and to stay ahead of losses, we make impulsive moves. Thanks to our partners at Rivkin Securities, you make the right ones.
Rarely does the application of emotions assist in decision-making. They are much better suited to celebrating the success of sound rational decisions. Much has been researched in the field of behavioural finance and the emphasis on how psychological influences impact investor deals.
Predictably, being unable to identify biases, often can result in investors taking risks they do not acknowledge, and impacting the way investors analyse and make judgements.
Regarding the share market, controlling one’s emotions is arguably one of the most important qualities of a good investor. However unforeseeable events can make that a far easier task in theory than in practice. Global (or even Local) events often lead to bouts of fear to come over investors that cause them to sell their stocks first and think later. The recent tensions surrounding North Korea come to mind. Although the consequences of any military action by North Korea (or the United States) would be severe, the likelihood of that happening often gets overblown in peoples’ minds and that causes them to sell.This type of market situation has occurred before, such as with the Fukushima disaster. Despite this being more a result of a natural disaster than purely man-made, stock markets sold off quickly following the tsunami and subsequent nuclear reactor meltdown, only to quickly reverse in the weeks after. With the benefit of hindsight, we can often see that the best buying opportunities coincide with times of heightened market fear and concern.
Although the market didn’t suffer a huge sell-off as a result of the political wrangling surrounding North Korea, there was plenty of fearful rhetoric from the financial media.
Although the market didn’t suffer a huge sell-off as a result of the political wrangling surrounding North Korea, there was plenty of fearful rhetoric from the financial media. Investors need to be aware that this fear can lead to investing decisions that are not entirely rational. In the days following Fukushima, in early March 2011, the ASX 200 sold off around 10% purely on general fears regarding the meltdown but by early April the index had completely reversed those losses. Companies were sold that had no exposure whatsoever to Japan or the energy industry. Sure, the event was extremely severe and scary from a humanitarian point of view but there were no links to most of the ASX companies whose shares were sold as a result of the disaster. For those who could keep their nerve and remain calm, this event represents a great buying opportunity.
Similarly, the Brexit vote was another Global event that led to panic selling on the ASX in companies with no ties to England or Europe.
What is the rationale for selling Woolworths stock because the UK is going to leave the EU? Companies with 100% of their operations in Australia were sold off as a result of the broad-based panic. For people with the goal of not losing money unnecessarily, remaining calm and level headed during these times will help them achieve this goal. For those a little more ambitious, events like this can provide great opportunities to enter positions at better prices than they would otherwise be able to.
Sometimes the disruption caused by global events merely disrupts the stock market and at others, it creates significant opportunity.
Rivkinhave a series of systematic strategies that follow a rules-based approach to investing. This means they don’t react irrationally when global events cause a rise in market fear that causes many retail investors to sell stocks unnecessarily. Each of their strategies follows a different theme and has a specific set of risk/return characteristics. For those wanting more capital stability, their income strategy offers a modest return with a low degree of market fluctuation. On the other hand, their momentum strategy has a very high return for those willing to accept a greater degree of portfolio volatility. Their members can choose which strategies they wish to follow and can take comfort in the fact that their investments are being made in a systematic manner with extensive back-testing to support the concept. Most importantly, they greatly minimise the negative effects our emotions too often play in investing decisions.
In a time when global instability becomes palpable, it is hard to disconnect entirely from the emotions that such events can provoke. While everyone falls into a behavioural finance bias at some stage, decision-making and portfolio confidence can only come from the systematic strategies Rivkin provides.
For a free look into one of Rivkin’s systematic strategies operating within the Australian share market, click here.