Ignore it all

As I sit down to write this article, almost every stock market in the world is forming a graph that is a 'V'. By itself, this is nothing remarkable. However, the depth of the 'V' in Japan on August 5, 2024, was absolutely ridiculous. That day, the Japanese market fell 12.4 per cent, and the very next day, it was up by 10.2 per cent. The August 5 decline was the largest one-day drop in history. The Japanese economy is no stranger to market swings, but to have the biggest-ever decline and then an almost complete recovery in one day is a bit extreme, even for Japan.

This certainly makes for juicy headlines and breathless social media posts about the extreme volatility of the markets. You will find references to the Bank of Japan raising interest rates from zero after 15 years. If you have the patience, you can also read more about something called the 'yen carry trade' and how it has collapsed or is collapsing. Then there are the usual suspects, like wars, elections, US economic reports, the Federal Reserve and so on.

If, like most readers of my columns, you are an investor focused on steadily building long-term savings, then pay no attention to this drama, as it is merely noise in the grand scheme of your investment journey. While these market fluctuations may seem alarming, they are often short-lived and have little impact on well-diversified, long-term portfolios. Instead of getting caught up in the day-to-day market movements, focus on your overall financial goals, maintain a balanced asset allocation and stick to your investment strategy.

If you've been an investor long enough, you will remember endless days in the past two or three decades when the markets were crashing, and the financial world seemed to be collapsing. I recall the frightening days in January 2008 when every day seemed to push the world an inch closer to a catastrophe. While the situation is nothing like that now, headlines worldwide seem dominated by crises in the last few years. Pandemics, wars, political conflicts in the neighbourhood and elsewhere, and likely a few more challenges may arise as you read this. It's natural to feel we're living through uniquely turbulent times. However, I think this perception is misleading.

Are you familiar with the idea of 'recency bias'? Even if you aren't, the term is self-explanatory. If we carefully ignore our recency bias, then a close look at history, particularly over the past few decades, reveals that our current state is not as extraordinary as it might appear.

If we were to experience a prolonged period of calm and stability, say, seven to 10 years without significant upheavals, it might be a cause for concern. Such a lull could potentially set the stage for a more dramatic reversion to balance out a period of unusual calm.

Just look back at the last 50 years. The 1971 war, then the 1973 oil shock, rampant inflation and conflict around the world, the deep 1980s recession in the West, the 1991 economic crisis in India, the Harshad Mehta scam and related scandals.

Then came the so-called 'Asian' crisis of 1997, followed by the 1998 Russian economic collapse, the dotcom crash of 2001, the 9/11 attacks and its aftermath. Then came the oil price bubble of 2003-08. The Global Financial Crisis of 2007-09 and the European sovereign debt crisis followed next. Then, there were the Covid lockdowns and the economic disasters they caused worldwide. And, of course, in our neighbourhood, there's Sri Lanka, Pakistan and now Bangladesh. I'm recounting a longer history than you would expect because I want my readers to sidestep the recency bias.

My point is that if someone were scared of bad news, they would never invest. Despite all this upheaval, it was entirely possible, and even easy, to steadily accumulate wealth over these decades by using the most straightforward investment formulae. The basics like diversification, asset allocation and a long-term focus alone would have gotten you through.

These dramatic swings serve as a reminder of the importance of staying disciplined and avoiding emotional reactions to the market news. Instead of running scared, use this opportunity to reassess your risk tolerance and ensure your portfolio aligns with your long-term objectives. In the end, successful investing is about patience, consistency and a clear understanding of your financial goals and not about reacting to every market hiccup, no matter how dramatic it may seem at the time.