Don’t Get Trapped by Short-Term Market Thinking

By John Steele   |   October 24, 2018

Yes, US Equities experienced a downturn last week—but don’t let the headlines scare you into a knee-jerk response.

It would be understandable if you’re feeling nervous, given the start to October in the broad U.S. financial markets. At the end of last week, the S&P 500 retracted 3.3% and the Dow Jones Industrial Average dropped 3.1%. Additionally, the Nasdaq Composite saw a 7% decline due to shifting values of tech stocks.

Yet, when evaluating the market from a long-term perspective, these recent market movements are relatively minor.

“At this very moment, if the markets stay the course, these recent market movements do not constitute a correction – typically noted at a 10% drop,” said Matt Geller, President of JOYN.

David Geller, CEO of JOYN, relates market volatility to this storm season.

“As we are all know, we are currently in hurricane season. If you track market volatility over time and the Great Depression was a Category 5 hurricane, these recent events would barely be a thunderstorm,” said David.

Even so, the recent negative headlines may have you feeling determined to take action, any action, with your investment portfolio. That’s why JOYN’s Behavioral Wealth Management approach encourages you to recognize – and ultimately overcome – your market anxiety that tempts you to make counterproductive decisions.

Why Is This Happening?

Let’s address why the financial markets have taken a turn for the worse, how JOYN and its advisory team have prepared for such downturns and how the precepts of Behavioral Wealth Management (hyperlink) can serve you well right now.

JOYN’s investment team recommends that investors look at the sudden U.S. markets downturn in a global context. The strengthening dollar, which hurts international companies that export their products to the U.S., and global trade tensions (most prominently between the U.S. and China) are taking a toll on foreign assets. Meanwhile, U.S. financial markets are showing signs of tightening due to rising short-term interest rates. Instead of hunting for value, investors worldwide are suddenly showing a keen aversion to risk.

“Last week the pop in U.S. interest rates, combined with a stronger dollar and ongoing concerns of trade wars, worried investors that future U.S. economic growth could be stymied,” concluded John Steele, JOYN’s Director of Investments.

JOYN was and Continues to Be Prepared

JOYN constantly monitors the dynamic financial markets, both in the U.S. and abroad. “Our managers stay vigilant for both sudden and gradual market shifts and seek to understand the driving forces behind them,” John notes.

Our investment team analyzes the reasons for an investment’s “maximum drawdown” – the decline between its peak and trough during a specific period – when building portfolios for clients.

JOYN has prepared for sudden declines in U.S. stocks by creating globally diversified portfolios that are optimized to provide maximum expected returns for their risk levels. “Optimized asset allocation, proper diversification and in-depth asset class research are not just sound-bites at JOYN—they are cornerstones of our investment process,” John emphasizes.

We emphasize investing in high-quality companies with long-term profitability outlooks. We don’t chase short-term performance, as history teaches that this often leads to negative outcomes. “It’s vital to avoid overreacting to short-term market noise and volatility—we emphasize a disciplined, quantitatively sound approach to constructing efficient portfolios,” John explains.

Understanding the Cognitive Biases We Fight During Market Volatility

CEO David Geller describes the four primary cognitive biases we fight during market volatility:

Myopic Loss Aversion Bias –

“The pain of an investment loss is twice as powerful as the pleasure of an investment gain,” describes David.  “Myopic loss aversion leads us to overreact to short term losses in our retirement accounts, for example, even though we don’t intend to spend the money for years.”

Confirmation Bias –

“We convince ourselves that we look at all the facts surrounding an investment and develop a logical investment decision,” said David. “The truth is all too often we make an investment decision, and then look for facts to support, or confirm it. We do this while ignoring or discounting facts that support a different conclusion.”

Herding Bias –

“We feel safer being with the herd and doing what everyone else is doing. In many cases, we minimize the need to do our own investment due diligence rationalizing that it must be ok if everyone else is doing it,” said David. “Never underestimate the power of the herd.  The herd mentality is the fuel behind every financial bubble, from the tulips in 1636 to internet stocks in 1999.”

Recency Bias –

“We extrapolate recent returns for ever into the future. So, for example, if oil prices have risen from $50 a barrel to $100 a barrel over the past twelve months, we lead us to believe they will be $200 a year from now,” said David.  “Recency bias leads us to buy investments that are expensive and sell investments that are cheap. The exact opposite of what you want to do.”

JOYN’s commitment to these sound investment strategies and incorporating behavioral science to managing stress during times of market unrest empowers our client community to weather any storm.

Investment Advisory Services offered through JOYN Advisors, Inc. Registered Investment Advisors. Insurance offered through JOYN Atlanta, Inc. Securities offered through Securian Financial Services, Inc. Member FINRA/SIPC. JOYN Advisors, Inc. and its affiliates are not affiliated with Securian Financial Services, Inc.

John Steele

About the Author

Read More By John Steele >>

Join Us

When wealth advisors look and sound the same, how do you choose? A coin flip? Pick your neighbor? Why leave such an important decision to chance? Instead, join us at an upcoming workshop. Hear recent research, discover new insights, and experience JOYN’s transparency and expertise firsthand.

Get In Touch