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Heroes Remembered, Black Swans, and Why Fear Sells

| September 11, 2017
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Those investors that have worked with MPCA for any length of time are undoubtedly aware of our appreciation for the insights gleaned from the field of behavioral finance, which tries to research and understand issues of investor emotions and investment underperformance. We also habitually quote research from Dalbar showing that during the 20 year period from 1997-2016, the average investor’s annualized return was an underwhelming +2.3%, compared to the S&P 500’s annualized return of 7.7% over the same time frame. While we will be the first to say that many investors should not benchmark the S&P 500 due to portfolio risk considerations, the impact of missing out on 20 years of 5% compounded interest for the average growth investor is rather painful to contemplate.

A major finding of behavior finance is that investors react, as do humans in general, much more strongly to negative news versus positive news. It follows that investors make the most mistakes when they make long-term strategy changes in response to short-term negative news events. Not the least among many problems with this emotional reality is that, more often than not, there is far more negative news than positive news. Therefore, the temptation is ever-present for investors to make knee-jerk decisions to bail on investments or suddenly change a well-thought out investment strategy, which usually leads to underperformance over time. Hence, the depressing Dalbar results.

Readers do not need our help in cataloging the litany of negative headlines floating around these days, even with the “good” news that Hurricane Irma’s impact was substantially less than feared. Between overvalued stocks, North Korea’s nuclear threat, the possibility of recession, political dysfunction, endangered tax reform, potential over-aggressive Fed tightening and more, there is more than enough ammunition for the headline writers to do their thing to stoke fear and sell media advertising.

While we have endeavored to draw attention to the good news of acceleration in global economic growth and corporate earnings, as well as attractive valuations in markets outside the United States, we understand that many investor nerves are frayed at the moment. But we also must acknowledge that, for some time now, the positives have been winning the battle over the negatives in global equity markets. The negatives still matter, obviously, but markets will persist upward in the face of negative headlines if the weight of the evidence points to continued economic and earnings growth.

Lastly, we would be remiss to not remember the ultimate “black swan” event in most of our lifetimes – 9/11/2001. Putting aside the investor commentary around this event, we simply pay tribute to those whose lives were lost and those families who continue to feel the sting of those they lost on that horrid day. What sticks out to us 16 years later is the continued resiliency of the American people, who sacrificially band together to lift each other up in the face of tragedy. As we have more recently seen with the response to Harvey, the generosity and grit of the American people knows no bounds when adversity is at its worst – and we simply hope and pray these same qualities of unity and determination can find their way to the more mundane parts of our communal lives.

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