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Why Worrying Hurts Our Investments

WorriedHere’s a quick question for you:: Do you still remember the Cyprus banking-crisis and how it might have made you feel about investing at that time?

Chances are, the Cyprus crisis – in which rescue efforts were termed “unprecedented” and involved the levying of depositor’s monies in the Cypriot banks – would have made you fearful of investing at that time but has since faded into memory.

Make no mistake though, the crisis was serious and it actually fuelled fears of a break-up of the European monetary union, more popularly known as the Eurozone.

But the thing is, as serious as the Cypriot crisis was, life still went on.

Big stories have a way of capturing our attention and make us place undue emphasis on its importance (as important as the story may be) but then slowly fade away to be replaced by the new investing-fear du jour that’s gripping the focus of the investing-media.

That’s the way the investment world works. Every so often, we get a new problem to worry about and place disproportionate importance on it in regard to its negative effects on long-term investment returns, probably only because of its short-term effects.

In short, as humans, we fall prey to the recency bias where we needlessly amplify the level of risks to investing due to recent events without consideration of long-term odds.

And that’s harmful for investors as they might succumb to these short-term fears and then sell-out on their investments even if it’s to the detriment of their long-term wealth.

According to Morgan Housel from The Motley Fool, since the 1850s, America has seen 1.3m Americans die in nine major wars; survived the assassination of four of its Presidents; suffered 675,000 deaths in a single year from a flu-outbreak; experienced 30 natural disasters that caused the deaths of more than 400 people each; been through 33 separate recessions that lasted a total of 48 years; saw 10% drops from a recent peak in the stock market at least 97 times; seen the stock market lose more than 30% of its value at least 12 times; and experienced annual inflation that has breached 7% in at least 20 separate years.

That looks like downright horrible news that could cripple any nation. But yet, the Dow Jones Industrial Average, a widely-followed measure of the US stock market, has climbed from around 20 points in the 1880sto more than 15,000 points today.

That’s a seventy-five thousand percent jump in stock-market wealth that Americans have experienced over the last 130 years.

How’s that possible? It’s possible because businesses in the USA have, in aggregate, been growing by producing more goods and services for consumption by Americans and the world alike. As businesses grow, profits follow and business value goes along for the ride too.

The horrors that America has faced – as gut-wrenching as they are – has not stopped companies and businesses from making more profits and slowly but surely improving the lives of society.

In Singapore, the Straits Times Index (SGX: ^STI) has jumped almost four-fold from 834 points at the start of the 1988 to around 3,200 points today, representing an annualised gain of around 5.5% over the past 25 years.

But, the ascent in the index was cast against some rough times faced by our stock market, our economy, and our society.

Just to recount a few, the STI has seen annual percentage drops in excess of 20% in three years out of the last 25; during the 1997 Asian Financial Crisis, we saw the Singapore dollar depreciate by more than 20%; the 2003 SARS outbreak in Singapore claimed 33 lives and severely impacted our economy.

Besides global worries such as the bursting of the dot-com bubble in 2000 and its ensuing fall-out in stock markets around the world, as well as the Great Financial Crisis of 2007-2009, the ‘rough times’ described earlier were just part of what would likely have captured the attention of the financial media here.

But, those worries have not stopped the STI’s nearly 300% increase in the past 25 years. In a rhyme with America’s situation, Singapore’s businesses slowly but surely expanded and grew their profits, enriching shareholders in the process, despite the prevalence of worldly and national troubles.

Foolish Bottom Line

Ultimately, the lesson here is that if an investor succumbs to the latest fashionable-worry without due regard for the actual odds of it managing to permanently destroy the wealth-building capabilities of the stock market over the long-term based on historical precedents, then the investor is doing himself the greatest of disservices.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.