It is during these times of extreme market turbulence that investors tend to make the biggest mistakes.
Investment author Lars Kroijer examines how we should react.
“I always ask, what is your risk tolerance? Has anything changed in terms of your knowledge about the markets and your ability to outperform the markets?”
“The overwhelming likelihood is no”.
“Whether it’s now or March 2009 and you’ve lost half your money, you still cannot outperform the market, you still can’t know what’s going to happen”.
Kroijer is correct. Because human beings are hard-wired to react to events.
And the bigger the event the more likely we are to react.
People forget that even if we look at financial markets over the past several hundred years, we will only look at the markets that were successful.
This is called selection bias.
Once every so often there will be a huge calamity.
2008 was that calamity.
Awful things happened. However, the banking system didn’t collapse, and no governments went bankrupt.
No one can predict the future and investors should be prepared for a severe market crash at any time.
Kroijer explains that the best way to do it is to diversify.
“Whilst there are no definite answers, if you had a broadly diversified set of stocks, there’s some chance that some sector, in some geography, would be okay”.