Horror stories are designed to artificially trigger our ‘fight, flight or freeze’ responses that send a wave of adrenalin through our bodies and prompt us to take action to escape the perceived threat.
This is typically achieved by a shocking break to gradually-built tension.
Investors will be all too familiar with this experience. Like a hapless character in a movie who runs from one threat right into the hands of the villain, a sudden fall in asset prices can prompt us to take swift action, only to discover later that we made a terrible decision.
In my previous career managing portfolios directly for individuals, I witnessed several examples of clients who insisted on selling their entire portfolio when assets were falling. While they often saved money when measured at the bottom of the market cycle, they typically failed to re-invest, believing they had escaped the threat of falling prices. Only later did they realize later that they had run into the arms of the great threat of not investing and they drifted further away from their goals.
When watching horror movies or market movements, it is typically better to look away when you are feeling uncomfortable.
-Dan Kemp, Global Chief Investment Officer, Morningstar Investment Management Europe