SINAGPORE - As investors, we tend to react more to threats that may cause us to lose money on our investments than to opportunities that may arise.
Our innate fear is no doubt reinforced by constant media noise about one crisis or another. Good news, on the other hand, tends to get short shrift.
The spectre of a financial disaster will always have a big bearing on our investment behaviour, no matter how improbable its occurrence may turn out to be.
Take the worry that the United States is about to plunge over a "fiscal cliff" - the rather evocative term used to describe US$600 billion (S$735 billion) worth of spending cuts and tax rises that automatically take effect in January if US lawmakers are unable to reach an agreement to resolve deficit woes.
The issue has been looming for months but it has only been in the past two weeks after the US elections that investors got cold feet and started switching out of stocks into safer assets such as bonds.
In a recent report, Bank of America Merrill Lynch's chief investment strategist Michael Hartnett suggested that perhaps some "buyer's remorse" had set in.
Prior to that, investors had merrily driven stock prices to a fresh four-year high in September.
Anyone who bought shares at those lofty levels is no doubt rather upset at the so-called fiscal cliff problem that is causing them grief and sending stock prices reeling across the globe.
In the past fortnight, Wall Street has fallen by as much as 4 per cent while the benchmark Straits Times Index crashed below the psychologically important 3,000-point level for the first time in two months.
But isn't the panic a tad overdone ?
For those of us with investment experience stretching back more than two decades, one apt parallel is the Y2K computer bug in 1999.
Some will recall dire warnings from computer experts that a global financial meltdown would strike on Jan 1, 2000 because lots of computers were supposedly unable to figure out how to register a four-digit date.
Alarmist theories abounded. Given the key role of computers, machines such as ATMs might simply fail, some suggested.
But nothing even remotely catastrophic took place. Life went on as usual on Jan 1 as people across the globe celebrated the first day of the new millennium (or the first day of the final year of the last millennium depending on which theory you subscribe to).
Right before a fat big nothing happened, governments, banks and businesses took extraordinary measures to tackle this imaginary bug.
On that fateful day, for example, the then Stock Exchange of Singapore, the Singapore Exchange's predecessor, went as far as to get dealers and remisiers to return to the trading room to test-run the trading system to make sure it was not infested with the Y2K bug.
That false alarm holds an important lesson - the need to think outside the box in times of crisis and not to follow the herd.
For novice investors, one important point they must remember about the stock market is that it moves in cycles. This, in turn, gives investors an opportunity to buy low and sell high.
Yet, time and again, they do just the opposite.
So, what can an investor do to avoid being caught up in the herd mentality in the face of bad news?
There are a few simple steps he can follow:
- Determine your investment time horizon
Since markets move in cycles, it may not be in your interests to liquidate your investment each time there is panic selling. Instead, you should determine how long you intend to keep your investment before you need it for retirement or buy a big-ticket item such as a house. That way, you will be able to ride out any market turbulence that comes along.
- Stop looking at stock quotes all the time
Every time you check the price of a stock you own, you may start second-guessing how the market is going to perform. You may start wondering whether to take profit and sell, if the market is falling.
- Adopt a dollar averaging approach
Instead of investing the same sum in the stock market every month, consider investing more when the market is down, and less if it is up. This will ensure that, over the long term, you buy low and sell high.
Though these steps may not guarantee that an investor finds his way to great riches, they will at least make his life less stressful, as he gets to stop wondering about how bad news is affecting his investments.
The fact is that financial disasters do happen, but it is how we respond to such catastrophes that will make a big difference to our nest egg eventually.