The Recent Market Decline and Human Behavior | ETF Trends

By Saumen Chattopadhyay via

The stock market has been tumbling lately with S&P 500 Price Index declining by 11.76% from its peak on October 5th till the date of this post, and the dramatic media headlines are roiling investor sentiment far and wide e.g. CNBC reported:

The stock market is on pace for its worst December since the Great Depression.”

An uneasy “fear” threatens to overwhelm human minds during this holiday season. To be fair, the market looks pretty grim and the latest market rout could roll on… or not. But before we get down the stream of feeling to thinking, similar to when we start to feel sick, and eventually believe we are sick; we need to realize that in the world of investing, emotions can cause investors to make sub-optimal decisions. Even the greatest investment strategy can prove to be worthless if a portfolio manager lacks the discipline and emotional fortitude to stay put. Alpha Architect noted that Even God Would Get Fired, who having clairvoyance and the crystal ball knew exactly which stocks were going to be long-term winners and long-term losers, would likely get fired many times by the investors during market volatility and severe drawdowns. This is due to investor’s Psychological Myopia, a tendency to think short-sightedly, that leads to terrible timing by assessing relative performance over short horizons. Because we, as human beings, often ignore pieces of information in decision-making processes, it makes us think short-sightedly.

Click here to read more on Iris.