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We Are Our Worst Investing Enemies

Decades ago, before behavioural economics was in vogue, the legendary investor Benjamin Graham wrote that “The investor’s chief problem – and even his worst enemy – is likely to be himself.”

How prophetic.

Earlier this week, Steven Russolillo from the Wall Street Journal cited data from Investment Company Institute showing that investors withdrew around US$8 billion from U.S. equity funds in the week after Brexit. Stocks in the US fell hard in the immediate aftermath of the United Kingdom’s vote to leave the European Union (they were down 5.6% two trading days after Brexit).

But, according to Russolillo, US stocks “fully recovered from Brexit less than a month later, with many of those investors [who sold from the U.S. equity funds] missing out on the rebound and locking in what should have been just a temporary paper loss.”

What Russolillo wrote about is a classic example of how we are our own worst enemies when it comes to investing. Many of us are simply unable to sit still without fidgeting with our investments when we are faced with temporary paper losses.

It’s a hard problem to fix. But, I think simply knowing how even the best long-term winners in the stock market have given investors a nerve-wracking time over short timeframes can go a long way in helping us develop the resolve to sit through periodic market declines.

Take hospital operator Raffles Medical Group Ltd (SGX: BSL) for instance. Since the start of 2005, its stock price has climbed an impressive 887%. Now look at the chart below, which shows the maximum peak-to-trough loss (known as the maximum drawdown) that Raffles Medical’s stock has suffered in each year from 2005 to 2014.

Maximum drawdown for Raffles Medical Group, 2005 - 2014
Source: S&P Global Market Intelligence

In the 10 calendar years we’re looking at, the healthcare company’s stock price has experienced a maximum drawdown of 10% or more in nine years.

The US-based energy drinks manufacturer, Monster Beverage, is another fantastic example. Over a 20-year span from 1995 to 2015, Monster Beverage was the best-performing stock in the US market with a total return of 105,000% ($1,000 invested in Monster Beverage in 1995 would have become $1.05 million by 2005) according to former Fool, Morgan Housel.

But, Monster Beverage’s stock had dropped by 50% or more from a peak on four separate occasions in those 20 years. Morgan added that “it lost more than two-thirds of its value twice, and more than three-quarters once.”

Even the best-performing stocks over the long-term can make you want to tear your hair out over the short-term. Keep this in mind the next time you feel the urge to sell your stocks after they’ve declined. It can be painful to sit on a temporary paper loss, but the eventual rewards can be tremendous.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Raffles Medical Group. Motley Fool Singapore writer Chong Ser Jing owns shares of Raffles Medical Group.