One of the most common aspects of the behavioral side of investing is the concept of loss aversion. This is when the losses hurt more than the gains feel good. Based on various sentiment surveys we follow and discussions with investors many are feeling loss aversion right now.
It can be easy to forget that for three years straight in 2019, 2020 and 2021 the U.S stock market rose at well above historical average rates. It felt good but can at times be taken for granted. Now that volatility has reemerged, and a correction has occurred many investors are feeling the stronger downside pain.
Sometimes it can be helpful to step back and look at past market corrections within the concept of the longer-term trend. We see below the large number of pullbacks that have occurred since the 2009 market lows. The market has tended to snap back quickly in a matter of months.
Admittedly we do not know if this time will be the same or perhaps more like we discussed in our recent monthly video. That scenario showed after a long run higher stocks sometimes need to trade in a sideways manner to digest those gains. If that was to occur, we would expect plenty of continued rotation under the surface creating potential opportunities.
There is admittedly plenty of concerns we have right now. Inflation, war, the Fed, rising rates and more. Of course, none of those are exactly breaking news. The market is aware of those and based on the poor investor sentiment much of it may already be factored into the market.
We think it is important for investors to remember that surprises can happen in both directions. We do not know when, from what level or why, but eventually a catalyst will spark new life to stocks. Timing of the market is extremely difficult. At times like these a quote from one of the greatest investors ever Peter Lynch is relevant. He said, “far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
At Parallel we believe it is best for the investor to have a disciplined investment process with an asset allocation that suits their timeframe and goals.