This is Jonathan Satovsky of Satovsky Asset Management, and today I wanted to talk about Halloween and hysteria.
So we’ve just had a correction in the global markets all around the world. And it has created a tremendous amount of emotional tension in the world.
We have two weeks till the midterm U.S. elections.
We have people expressing concerns about trade policy, about the Federal Reserve, about the President. There are a lot of things that people are concerned about,; money supply.
So let us take a step back and a bit of perspective. This week there was a AAII Sentiment Survey and 41% of people have a very negative view about the next 6 months. While only 28% of people have an optimistic view of that next 6 months.
Now, investing is a long term process that’s intended to be over a lifetime. But it’s hard when emotions and volatility pick up because when volatility picks up, people are more susceptible to making emotional decisions.
So perhaps in looking at money flows you can see this more clearly because at the end of September as U.S. market prices were rising, people were investing with confidence. And as markets have started decline of course people are selling in massive quantities in the U.S. and outside of the U.S. in both stocks and bond markets.
So to give a little context, despite average average entry year declines of 13% a year, the markets have gone on to achieve tremendous gains for people that are long term investors.
But while you’re going through it there’s a lot of opportunity to shoot yourself in the foot. Which makes it all the more important as we often talk about concentrating to get rich and diversifying to stay rich.
So depending on where you are on your stage of life, you can look at these declines as an opportunity and excited in a gift to buy more and have greater stakes in businesses and ownership of assets over a longer period of time.
But that’s not how everyone looks at it.
So if you look at this month alone you can see U.S. small companies have declined the most. Close to 15%, while over the last 10 and 20 years they’ve been the best performers which makes sense because you would expect that small businesses are the driver for growth.
And historically, small companies have generated the highest return in the U.S. and outside of the U.S. all around the world. Small businesses are the driver for growth. So that’s where a lot of emotions lie because when you’re concentrated in a small business, we work with many business owners where it could be 90% of their entire net worth is tied up in their business. They’re running a profitable business.
So the transition from the profitable business to invest passively in other businesses becomes a very big emotional hurdle for people. So often we try to look to construct a more balanced portfolio. Perhaps something that has a more flexible mandate of stocks and bonds all around the world.
And by doing that, you’re missing the highs and lows; And you have a more smooth path that you can cover your spending plus inflation in taxes with a little less stress; And you can see there’s a lower decline even month to date; And there’s less sharp extremes which is more palatable for people emotionally.
That’s a really important thing to remember as we get into the holiday season because with Halloween as everyone’s trick-or-treating and pre elections come upon us.
Be mindful about the emotions of those around you. And remember that the future is always brighter than the present even though it may not look that way at moments in time.