The tragedy of emotional investing [Quarterly Perspectives] - J.P. Morgan Asset Management

The tragedy of emotional investing [Quarterly Perspectives]

Contributor Global Markets Insights Strategy Team

Since 2009, the S&P 500 Index has surged 250%, providing a generational opportunity for investors to boost their retirement accounts. Tragically, fund flows statistics show that many retail investors have failed to capitalise on this opportunity, piling into bond funds instead.

Invest with your head, not your heart

Retail investors often allow the way they feel about the world around them to influence their investment decision-making. But seldom in history has the damaging result been on such raw display:

  • The technology bubble of the late 1990s is a striking example. From 1997 to 1999, cumulative flows into equity funds were 13 times higher than flows into bond funds. The tech bubble burst on 24 March 2000, and in the next two years, the S&P fell by roughly 50% and Nasdaq by 80%, wiping out trillions of dollars in wealth.
  • If the technology bubble was about greed, the period since the 2007—2009 financial crisis has been about the opposite emotion: fear. Despite a meteoric rise in stock prices, retail investment flows have been net negative in equities, and overwhelmingly positive into bond funds. Again, investors made the wrong call at the wrong time - all because of how they feel.

What retail investors can learn from the ‘smart money’

Individuals have pulled money out of equities during the current bull market while the ‘smart money’ institutions have continued to add risk assets. Institutions typically have a robust investment discipline with set targets, helping them avoid the emotional pitfalls faced by retail investors, such as ill-timed investments or heavy imbalances in a portfolio.

Time and diversification

Investing for the long term and in a balanced, well-diversified portfolio can help investors achieve their retirement goals.

  • The chart below shows a series of returns for bonds, stocks and a 50/50 blend of the two.
  • Over short time periods, almost anything can happen. As the chart shows, the best one-year return for stocks since 1950 was a gain of 61%, while the worst was -43%. That is a range of returns spanning 100%.
  • The worst five-year rolling return for a 50/50 blend of stocks and bonds would have produced an annual loss of only 1%. This includes the 2008 declines of the financial crisis in several of the rolling periods. It also includes the recovery - and thus better results for the investor.

Investment Implications

  • Investors who can shake off the behavioural biases that distort their decisions may be able to improve portfolio performance by taking advantage of long-run expected equity returns.
  • Investors’ fear of short-term declines in equities losing is causing them to miss out on income opportunities and potential long-term returns.


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Important information

Please be aware that this material is for information purposes only. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. JPMorgan Asset Management Marketing Limited accepts no legal responsibility or liability for any matter or opinion expressed in this material.

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