The Nasdaq closed Monday in correction territory, turning the market’s most crowded trade—long tech stocks—into its most painful one.
What should you do next, tech bulls? Answer: Stick to the data—and don’t listen to your gut.
“We currently have the perfect storm for emotional investing,” said Greg B. Davies, head of behavioral finance at Oxford Risk, a markets technology firm.
Oxford Risk defines “emotional investing” as trading governed by a trader’s behavioral impulses, with the buying and selling of investments based more on the back of markets’ daily gyrations than on any obvious fundamentals. Much has been written about the virtues of a buy-and-hold strategy. The upshot: In both up and down markets, such a strategy will reduce volatility and cushion a portfolio against big losses.
Even before the pandemic, emotional investing could cost investors around 3% in lost returns a year, Oxford Risk says. At the other end of the spectrum, there’s the more cautious investor who responds to heightened market volatility by moving into cash. Such a reluctance to invest could cost the investor around 4% to 5% in lost returns.
“The pandemic means many investors are currently highly emotionally sensitive and have a shortened emotional time horizon, which increases the appeal of get-rich-quick gambles,” Davies adds. He points to the steep rises in crypto assets, a volatile asset class that many investors don’t fully understand.
For all the talk of “buying low and selling high,” emotional impulses make it hard for investors to resist market gyrations. “This often leads to people piling into investments when markets, stocks, or asset classes are high, and selling when they are low, often instigated by a huge amount of ‘noise’ around these investment opportunities,” Oxford Risk says.
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