Discretionary Investment Management | Katrina Bray
18 May 20
Weekly update - Looking hard for the positives
“Today was a Difficult Day,” said Pooh. And there have certainly been some difficult days in recent weeks which will have no doubt impacted how we are feeling.
The negativity bias is the phenomena by which humans give more psychological weight to bad experiences than good ones. In fact, psychology researchers assert that negative emotions have an impact of around three times stronger than positive emotions. This means that it takes three or four positive emotions to outweigh the impact of a negative emotion of the same magnitude. In short, “bad stuff” is stronger than “good stuff.” Subsequently, you think about bad experiences for longer periods of time and they weigh more heavily upon you.
The negativity bias served a strong evolutionary purpose. Being highly attuned to danger in the environment allowed humans to survive natural threats such as predators. Paying attention to bad, dangerous, and negative threats in the world was literally a matter of life and death. Those who were more attuned to danger and who paid more attention to the bad things around them were more likely to survive. This meant they were also more likely to hand down the genes that made them more attentive to danger.
However, this natural bias can be damaging to your future, especially when it comes to investing. The emotional pain of a capital loss is felt much more acutely than the joy of an equal capital gain. This can lead to excess risk aversion from investors, especially in times when there is a lot of bad news around, such as during the Covid-19 pandemic. The press and media are well aware that negative news stories attract more attention (eyeballs and clicks) than positive stories and therefore we are bombarded with negative news, which perpetuates these biases and fuels further risk aversion.
Long-term investing isn’t about hunches, emotions, or making quick profits. It's about using sound strategies to accumulate wealth over time. You can take the emotion out of investing by owning a broadly diversified mix of investment types. A diversified portfolio can help ensure that you’ll have exposure to the next asset class upswing before it happens.
One way to overcome negativity bias is not to check the valuation of your investments too regularly. Statistics show that for the average investor checking their portfolio valuation on a daily basis, they are likely to see a positive movement around 52% of the time, which means that the remaining 48% of the time they will see a negative return, leading to negative emotions. Checking every three months increases the probability of a positive return to 68% and checking annually increases this further to around 75%. In this way investors can worry less about short term volatility and focus on the longer term.
In times when bad news is all around us, it is important to try to remain optimistic and look hard for the positives.
One positive outcome from COVID-19 is the effect on the environment.
Carbon emissions are down globally and with manufacturing and air travel grinding to a halt, the planet has had a chance to rejuvenate. Lockdown has also fuelled a rejuvenated sense of community and social cohesion and is driving a new wave of corporate social responsibility (CSR). The global pandemic has become a litmus test for how seriously companies are taking their CSR and their work with key stakeholders: the community, employees, consumers and the environment. It has offered us a new perspective on everything we have taken for granted for so long – our freedoms, leisure, connections, work, family and friends. It has also demonstrated how successfully humans are able to adapt to new challenges such as working remotely. It has fuelled unprecedented levels of innovation with many businesses undergoing rapid digitalisation to offer their services online.
Ultimately we will get through this pandemic and there are many reasons to be optimistic for the future.
We hope that you will all find time to get outside to enjoy the fine weather this week…another reason to remain positive!