Errors in your investments: Microscope or Telescope?

Have you thought that: Maybe your emotions could be sabotaging your investments? Or seen in another way: one of the greatest dangers to the growth of your wealth, could you be yourself?

The fault is not yours, it is about how you should analyze the information that you continuously receive, from the media and social networks.

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Investments in the stock market

We know that investments in the stock market are for the long term, and rationally we understand it is like planting a tree. To see the fruits takes time, and only those who have the patience to wait will be the ones who will see the fruits tomorrow.

Those people who demand the fruits in the short term are the ones who will probably kill the tree, believing that riches are built in the short term.

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This way of looking at investments has proven to be the greatest source of wealth generation for most Americans. These have retirement plans and invest over time automatically, without looking sideways or short-term news.

So why do so many people care so much about the news right now?

It seems that they are viewing their investments through a microscope; but, if you are clear that it takes time you should use a telescope to see your long-term goals.

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Media and your investments

The media are specialists in using alarmist synonyms when your money is going down in the stock market; since, it generates a higher level of rating or followers.

Falling for this sensational news makes you think that the world may end, and also you think that this time is totally different from the other times, and that something very serious is going to happen.

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Inflation in the 1980s in the United States was generated by other factors. This allows us to see that there have been worse moments in history, and then we have seen that the results obtained in the medium and long term have been favorable.

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Paul Volcker as Chairman of the Federal Reserve

In 1979, Mr. Paul Volcker was appointed President of the Federal Reserve. As president, he had the great responsibility of lowering inflation in the United States, which had reached 11% that year, and also unemployment was higher than it is today, reaching almost 6%.

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Whereupon Mr. Volcker begins to apply a series of measures to restrict the amount of dollars in the economy (any similarity is mere coincidence), and begins to raise interest rates, but in a really strong way:

• In April 1980 the interest rate of the Federal Reserve reached 19.39%, well above the rate currently being raised.

• A 6-month certificate of deposit paid an annualized interest rate of 18%; while, for September 2022, they are 0.65% for one year.

• Mortgage rates reached levels of 18.6% in 1981, almost three times what they are today.

The stock market shook severely. This led the Standard & Poor 500, (index that brings together the 500 largest companies in the USA) to a fall of 27%, which was experienced for about 20 months ending in August 1982.

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The investment gurus

In this period countless investment gurus tried to predict where the markets were going. They tried to predict if it would continue to drop or if rather the bottom had been reached and a big rise would come.

Millions of people lost their money. This happened because they believed that they had to do something, and they thought that the best recipe was to continually move their investments by buying and selling.

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Inflation was brought under control and investors who stayed put, who did not guide their long-term actions by emotions or short-term news, were the big winners.

If you would have invested in the Standard & Poors 500 (S&P 500) from the time Mr. Volcker entered your position in 1979 until his departure. He could have generated a 215% profit according to FactSet Data, and had he invested in bonds instead, his profit would have been 143%.

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The great learning

So while it is true history does not explain what can happen in the present, it does give us a conceptual framework that serves to make decisions. Being the great learning:

“When investing in the stock market, remember that it is for the long term, do not look at the news through a microscope, but rather set long-term goals, such as: your retirement, your children’s education and saving. for that business you’ve always wanted.

It is there where you must use a telescope to analyze the actions that you must follow today to achieve your financial goals”

Source:

NY Times

Morningstar: Inflation, Market Volatility, and Your Mind by Samatha Lamas.