Sam Sivarajan is a speaker, independent wealth management consultant and author of three books on investing and decision-making.
My daughter loves sports, but she doesn’t like watching her teams play. She feels that she will somehow jinx them into losing. She knows that whether she watches or not can’t influence the team’s play on the field but that doesn’t stop her jitters. Unfortunately, the same can’t be said for investors and investing.
The saying “a watched pot never boils” fits well with investing. Constantly checking the market can lead to emotional decisions and poor choices. Nobel Prize winners Richard Thaler and Daniel Kahneman, along with their fellow researchers, found that evaluating risky assets daily increases the chance of lower returns compared with investing in safer options like bonds. This suggests a more hands-off approach might help reduce panic selling during volatile times. Like checking your weight every day, checking your portfolio too often provides more noise than value.
This idea was put to the test recently. The first full week of August began with a jolt. The Dow Jones index, DOWI dropped 1,000 points. The Japanese Nikkei 225 index, N225 fell more than 12 per cent, its worst decline since 1987. These sharp swings caused a wave of anxiety among investors. Many rushed to sell their stocks, while others scrambled to understand the latest economic data.
Economic reports fuelled much of this volatility. The S&P Global US Manufacturing PMI fell to 49.6 from 51.6 in June, below the 50.0 no-change mark for the first time in seven months. Meanwhile, the U.S. unemployment rate rose to 4.3 per cent, up 0.2 percentage points from June. These signs sparked fears among armchair pundits that the Federal Reserve had waited too long to reverse its rate hikes, and that a recession was around the corner.
The market drop was eerily similar to that in March, 2020, when markets plunged as COVID-19 spread. Back then, fear and uncertainty from the pandemic gripped investors, leading to mass sell-offs on the back of limited data and spurious forecasts. But those who ignored the noise and stayed invested saw a remarkable recovery. By the end of 2020, major indexes not only recovered but hit new highs.
John Kenneth Galbraith once said, “There are two types of forecasters: those who don’t know, and those who don’t know they don’t know.” This quip highlights a serious point – market reactions often stem from attempts to predict economic events such as central bank actions, economic reports and unemployment data. The recent volatility was no different. It would serve investors well to remember that, historically, forecasters usually miss the mark.
Another contributing factor to the recent volatility was many investors’ sudden realization that the market had gotten ahead of itself. The generative artificial intelligence frenzy overlooked the fact that this technology may generate headlines but increasingly looks unlikely to generate enough profits – for sellers or users. Such a hype versus reality collision always affects markets – we have seen it before during the dot-com boom (1990s), the resource boom (2000s), the fintech boom (2010s) and so on.
With a well-diversified portfolio, an investor can avoid the behavioural temptations of jumping on the latest bandwagon and of constantly checking the portfolio, which can both lead to intemperate actions. Historical data show that the risk of losing money on a diversified stock portfolio decreases over longer time periods. In fact, data from J.P. Morgan Asset Management show that a balanced portfolio of stocks and bonds has never lost money over any 10-year period from 1950 to 2023. Notably, this period includes major downturns: like Black Monday (1987), the Tech Wreck (2000-02), the Great Recession (2008-09) and COVID-19 (2020).
There are key lessons for investors in all this:
Avoid Timing the Market: It’s nearly impossible to succeed. Missing just the 10 best days in the stock market over 20 years can halve your overall returns.
Diversify: Spread investments across different asset classes and regions to reduce risk. A diversified portfolio can better withstand market volatility.
Focus on the long term: Maintain a long-term perspective. Markets have always rebounded from past downturns to reach new highs, rewarding patient investors.
Stay informed but calm: Keeping up with market news is important, but impulsive decisions based on short-term changes can be harmful. Stick to your investment plan and avoid knee-jerk reactions.
August’s market drop was dramatic, but it recovered some of the loss over the following days. This doesn’t mean there won’t be more drops ahead. It simply means reacting to every market move makes little sense for most investors.
By learning from past events and adopting a disciplined, long-term approach, investors can navigate turbulence with confidence. Avoiding market timing, diversifying investments and managing emotional reactions are key strategies for long-term success.
As Warren Buffett wisely said, “The stock market is designed to transfer money from the active to the patient.” This is good advice for investors looking to achieve long-term goals.
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