How to Cope When the Value of Your Portfolio Goes Down

How to Cope When the Value of Your Portfolio Goes Down

The COVID-19 pandemic has sent ripples through all aspects of our lives, and unfortunately, the stock market was no exception. While market corrections usually take months to unfold, global markets fell heavily in a matter of days. Indeed, investor panic sent the stock market into the fastest bear market in history. So, how do you cope seeing the value of your portfolio going down by 10%, then 20% or even more, depending on your risk profile?

As an investment professional myself, who has a Master degree in economics, I can tell you every single market crash for the past century. The COVID-19 correction is the first crash in my career (also telling my age!), and I came to the conclusion that my own reaction greatly differs to that when I study these events retrospectively. I couldn’t help but wonder, how do non-investment professionals and, in particular, our clients think about these types of heavy falls in their portfolios?

Behavioural economics explains these phenomena in two terms: hindsight bias and loss aversion. The first one, also known as, ”I knew it all along”, is a widely studied decision-making trap. It refers to the tendency for people to overestimate their ability to predict an outcome that could not possibly have been predicted. Another cognitive bias – loss aversion – is based on the concept that the relationship between risk and return is not symmetrical. This means that we feel much more comfortable with ups rather than downs; it explains why we are so anxious about losing money. I expect many clients would be more concerned with a 10% loss in their portfolio than a 10% gain - making money is logical, losing money is emotional!

The key to removing these biases is so hard, and yet, so simple. Knowing that your mind plays tricks on you is half of the battle, but there are ways you can outsmart your own cognitive biases.

So, after speaking with my colleagues (especially the ones who have experienced more than one market crash) and experts in psychology, I have combined a short list of tips that could help you to keep your head high in the current environment:

Sandra Dailidyte // Client Senior Manager


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