By David Baskin January 14, 2016
This morning I met with a couple who became Baskin Wealth clients in January of 2003, now thirteen years ago. The wife had called me a few days ago, crying, concerned that all of their savings were going to be lost due to the ongoing market crash which she was hearing about on TV and the internet. When they arrived this morning her hands were red from wringing and her eyes were red as well. Her husband was bemused. He didn’t know what to tell his wife.
In preparation for the meeting I had worked up their file. Over the course of thirteen years their portfolio had produced a compounded return of 8.7% per annum, after fees and expenses. They had a cumulative return of over $1.5 million. Even last year, with the horrible market in Canada, they made about 2%. This year, they are down about 6% in thirteen days.
In our meeting I pointed out that over the last thirteen years there have been 365 consecutive thirteen day periods. Many of them have been worse than the last thirteen days, but now, we cannot remember any of them. Over the course of time they have faded into insignificance. Or perhaps more accurately, can now be recognized as insignificant, because over thirteen years, no two week period will really matter that much.
Readers of the emerging literature in behavioral economics will recognize the cognitive errors into which our client has fallen. Recency bias, loss aversion and confirmation bias (she is a chronic pessimist) have all led to her present condition. She has focused on thirteen days and forgotten thirteen years.
I also told her this: Yes. I know it’s miserable, but these are the times when we all need to listen to our heads and ignore our hearts (and guts). The flight response is very deep-seated and we all have it hard-wired into our brains. Running away is the worst thing we could do. We saw it in 2008/09 – the only investors who ended up losing money were those who panicked.
So yes, stay the course. It’s the hard thing but the right thing.