One Year Later: A Lesson in Behavioral Finance
March 23, 2021 marked the first anniversary of the stock market bottom from the Coronavirus Crash. In case you don’t recall the details, here’s a quick refresher:
- Large stocks (S&P 500) were down 34%
- Small stocks (Russell 2000) were down 42%
- Bitcoin was down 67% (more to come on our take on cryptocurrency in a future Viewpoint)
Junk bonds, developed international stocks, and emerging markets got crushed, too. Do you remember billionaire hedge fund manager Bill Ackman’s CNBC interview in which he predicted, “Hell is coming” and warned, “America will end as we know it”?
Some were able to brush off the Ackman interview, acknowledging the full-time billionaire hedge fund manager and part-time CNBC talking head was going to get the attention he was seeking with those exaggerated claims. But there was an interview that gave pause to many—the interview with James Bullard, President of the St. Louis Federal Reserve. His prediction? A record-setting 30% unemployment and a 50% crash in GDP.
At the time, the seemingly prudent decision was to get out of stocks, at least until “the dust settled.” Being bullish on stocks wasn’t just going out on a limb—it was considered a reckless disregard for the reality of a developing pandemic.
At Truepoint, our investment team plays a key role in contextualizing market and economic news to help our clients stay invested for the benefit of their long-term financial plan. When markets are climbing, it’s a message that is considered reassuring and steadying, if not repetitive. But when markets are crashing, it can sound aloof and indifferent.
Morgan Housel, behavioral finance expert and the author of The Psychology of Money, explains why:
“Pessimism is intellectually seductive in a way optimism only wishes it could be. Tell someone that everything will be great and they’re likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention.”
Contrary to our typical advice, please check your 1-year portfolio returns today. If you like what you see, remember, the changes you DIDN’T make to your portfolio are responsible for the impressive return. The single decision to NOT act in the heat of the moment, when the sky appeared to be falling, probably outweighed every other investment decision you made over the prior decade. Reread that sentence a few more times and commit the feeling to memory. It may be the most valuable shred of perspective we will ever offer you.