cautions investors not to think only of extreme scenarios, to never underestimate risk, and to maintain a disciplined investment process.
In the first section, author Adam Collins notes that extreme scenarios get more traction because business media “makes a living out of freaking us out.” He also points out that investors are psychologically anchored to the financial crisis because that was the most recent recession. But that crisis was extreme relative to average downturns, in both degree and time, and future recessions are unlikely to be as punishing.
Many investors are reassessing their risk tolerances, and Mr. Collins sees this as a positive. He recommends that investors first calculate the total dollar amount of their equity positions. Then, ask themselves if they could tolerate a 50-per-cent decline without giving up and going to cash. If the answer is no, they need to reduce their equity allocation, in his opinion.Abandoning discipline is the third counterproductive investment strategy for investors to avoid in the current crisis.
Periods of fear and anxiety are the price investors pay for the long term wealth available in the stock market simply by buying and holding. The trick for most investors is to avoid getting in their own way – by panic selling quality stocks, for instance - when things get difficult.This is the Globe Investor newsletter, published three times each week.
The idea that the worst of the global selloff may be over has support from an unlikely source: Italy. Italy’s benchmark, the FTSE MIB, touched its lowest point in the current selloff nearly two weeks ago – an eternity given the furious pace of the downturn.