This time it is different. These, in my opinion, are the most dangerous words that can be thrown around during a market correction or crash. Whether it was the dot com bubble burst, the US subprime crisis, the Covid crash, or the current inflationary environment and turmoil in Eastern Europe, people tend to panic when markets go down.
Invariably, when markets are down, nobody is happy. Clients, fund managers and financial advisors all want to see markets running and growth in clients’ investments. However, this is simply not how markets work. One of my favourite quotes on market volatility comes from Charlie Munger, the vice chairman of Berkshire Hathaway and Warren Buffett’s right-hand man: “If you can’t stomach 50% declines in your investment, you will get the mediocre returns you deserve.
The behaviour gap is a type of behavioural bias that is widely spoken about in investment circles. Put simply, it is the difference between the rates of return that investments produce when an investor makes rational decisions and the rates of return investors actually earn when they make choices based on emotions.
A great way to protect yourself from the effects of a market crash is to ensure you have an emergency fund that is protected from market volatility. In reality, a stock market crash impacts a lot more than the value of your portfolio. It can have an impact on things like inflation, consumer spending, and employment.
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