The Risk of Investing, As Demonstrated by John’s Mom

John Noonan Uncategorized

Of the hundreds of people we help with their investing needs, only one person called in panic during early February, and again, two days after the Brexit vote. It was John’s mom.

And that makes her perfectly normal.

As a recap, the market started the year by sliding over 12% through the first five weeks. Then England shocked the world by voting to leave the EU, and we dropped another 6% in only two days.

As humans, we are programmed to avoid danger, and our brains translate market downturns as danger. Furthermore, studies show that we feel discouraged by an investment loss far more than we feel happy about an equally sized gain, and that recent events hold far more weight in our decision making process than do long-term historical trends.

John’s mom was just being human.

Unfortunately, our humanity can often times interfere with our investment goals. Markets average about 10% per year, and a common goal is to capture as much of that as possible over the long term (in the short term, we may not get that 10%, as has happened over the last two years of flat markets). But that reward is inextricably tied to risk – something our brains are begging us to avoid.

Imagine we told you on January 1st that the market would experience downturns of 12% and 6% over the first half of the year. Would you want to be invested? Probably not. Yet, despite these two events, the markets managed to eke out a gain of a couple percentage points through the first half of the year. It’s not much, but it’s much more than anyone would’ve received if they had jumped ship in February or after the vote, as John’s mom considered doing. (She didn’t.)

So thanks, John’s mom. You reminded us that risk in markets is pervasive, and that discipline is the key to earning the reward that comes with it.