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14 April: our response to fear

4 mins
Rebecca Cretney, 
April 2020
14 April: our response to fear

Two major disasters have crossed paths and it seems that the only good news we read about these days relates to how the coronavirus pandemic is slowing down climate change. Otherwise the press is full of heart-breaking stories of loss, peppered with acts of kindness and a sense of us trying to pull together. No one can tell us with absolute certainty what the future looks like, or when this will end. It can feel like we are staring into the deep unknown.

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Studies show that if faced with a choice between one really long electric shock at a known time and a short one which may or may not come, most people would choose the long, certain one. Get it over and done with. Take the pain and move on. Living with uncertainty is akin to living under a constant threat. As a response, most people desperately search for certainty in the form of cash – unfortunately that reaction may be at precisely the wrong time – very possibly when they should be adding to their portfolios.

Heeding to emotion when investing more often than not leads to the typical buying high, when you think a bull market is going to last forever, and selling low, when you think the world is surely about to end. Right now, our view is that the long-term upside potential in markets is far greater than the possible downside. History tells us that the ‘best’ trading days (or highest stock market returns) usually closely follow the worst. We all know this, but fear often overrides logic as we have an instinctive aversion to loss. Psychologically, the fear of loss is, in fact, deemed to be at least twice as powerful as the exhilaration of an actual gain, as demonstrated by Kahneman and Tversky in 1992.

Fear is an old and strong emotion. It has been handed down to us by our prehistoric ancestors and is hardwired into our brains as a protection mechanism. And the oldest and strongest kind of fear is fear of the unknown. Fear triggers the part of our brain which controls the body’s vital functions, such as heart rate, breathing, body temperature and balance, to take over. So when fear kicks in, our response is fight or flight. At the extreme, it takes five milliseconds to shut down our digestive system, inhibit our peripheral vision and increase the capacity for the heart and lungs to run. To put the five milliseconds in context, blinking takes 300 milliseconds.

This is clearly the extreme, but nevertheless useful to bear in mind when considering how anxiety can lead us to take a knee-jerk reaction when fear about our investments sets in. This is precisely one of the advantages of having portfolios managed professionally. It allows our clients to hand over the day-to-day decision making to our investment team, thereby avoiding these emotions affecting clients’ investments. We have a strict and time-tested investment process in place, which is based on logic, research and analysis. This doesn’t mean some of the decisions we make on your behalf are easy; at present, for example, things are changing so fast that our investment committee is meeting daily.

It is difficult to predict the short term in normal market conditions. But it is practically impossible to build financial forecasts with a virus as your input variable. Add to this how differently major world powers have reacted to both the virus containment and the economic impact, and you will see that the short term is practically impossible to forecast with any degree of certainty. Over the long term, however, one can assume a return to normality, analyse which companies have balance sheets able to withstand this storm, those whose revenue streams will not be impacted by the crisis and those who will be nimble enough to adapt to the changing landscape, as I explained in my article The Opportunity for Investors (27 March).

You can also access our quarter-end investment webinar on 22 April at 12.30 p.m. when we will go over the last three months’ news flow, explain what changes we have made to portfolios and share our view as to how events might pan out, and what the impact might be on markets going forward. You can also ask any questions about our investment approach. You can
register for this webinar here, although please note that you will need to register for an account with our webinar provider, if you haven’t joined a webinar so far.

So we encourage you to get in touch, whether it is to better understand our positioning and strategy, or to let us know about any changes to your circumstances that we need to understand, in order to include them in your financial plans. We do this with your long-term goals and objectives in mind, which your private banker discussed with you when the investment strategy was agreed on. During these strange times of working from home, your private banker is at the end of a phone line or video link.

At Nedbank Private Wealth, we have been working closely with private clients across generations, and are ideally placed to create wealth solutions tailored to your needs, both within the UK and internationally. If you would like to find out more about our approach to investing, please contact us on +44 (0)1624 645000.

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Rebecca Cretney

Rebecca Cretney

Investment Counsellor

Rebecca joined Nedbank Private Wealth in May 2004 having moved to the Isle of Man from Barcelona to pursue a course in Business Studies with the Isle of Man Business School. Rebecca was appointed to the role of investment counsellor in March 2019 to focus exclusively on the company’s discretionary investment management services. She works closely with our teams of private bankers to provide support in advising our clients with integrity, and to give additional technical investment expertise where more complex portfolio requirements exist. Rebecca is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Chartered Wealth Manager.

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