Do you remember the endless summers of childhood? When your parents dragged you and your annoying siblings on those car trips that seemed to take forever (but were really more like two hours)?
My office window overlooks the local high school’s football stadium. Last Friday, I was wrapping up emails and heard the familiar sound of the school’s marching band warming up for the first Friday night football game. I can’t believe summer is over and school is back in session. It feels like only last week that I was listening to that same stadium blast “Pomp and Circumstance.” For many years now, endless summer seems to only apply to the interminable heat of the Valley.
I’ve chalked this up to the fact that life is getting more complex and more fluid (thank you, Apple, Google, Facebook and Amazon Prime). But there’s another, more scientific argument. Time, as our high school physics teacher taught us, is relative. When you were 5 years old, the three months of summer represented 5% of your life. At age 40 it clocks in at around 0.6%. Perception is everything. If you have 90 seconds, I recommend checking out this illustration for yourself. Stick with it. It gets really crazy (scary?) around age 30!
I was thinking about that website and this general phenomenon during the stock market volatility of the past few weeks. It seems to me that everyone has an investment age that is distinct from biological age. Your investment age is the number of years you have been an investor. And I think it is just as prone to the bias illustrated by the link above.
When you are new to investing, a few trying weeks in the stock market—or even a particularly bad one-day sell-off—can seem to have rippling consequences. Is your investment philosophy sound enough to survive this? Should you change something? Maybe you now have less money than you did at the beginning. You question why you did this whole investment thing at all.
For new investors, a small period of performance can represent a meaningful part of their investment experience. And that can cause them to assign it a greater sense of importance than it should have in a long-term investment picture.
For seasoned investors, short-term performance is only a blip on the radar, a small part of their overall investment repertoire. They see sell-offs as inevitable at worst, and opportunities to buy stocks at best. Consider this: The most recent drawdown in China ranked only 21st in terms of losses experienced during China’s 25-year stock market history. How’s that for perspective?
The good news is that, unlike when you were 5 years old, you young investors can be aware of this bias. You can use that awareness to empathize with the gnawing panic rather than empower it. And that improves the odds that you will stop your perception from prompting decisions that could change your financial future.