What can parenting teach us about investing?

My daughter is three and the other day, while we were out in town, she threw a massive tantrum. One minute, everything was fine – smiles and laughter. The next, she was on the ground flailing and screaming as if the world was ending. As a parent, you learn not to react emotionally and, funnily enough, that same skill is invaluable in the investment world.

Markets, much like toddlers, can throw tantrums. Volatility can be unsettling, but staying calm and tuning out the noise is key.

I like the chart below because it highlights an important reality. Over the past 24 years, US equities(as measured by the S&P 500) have fallen by an average of 16% at some point in each year. This is the largest peak-to-trough drop during those 12 months –the ‘maximum drawdown’. This might sound alarming, but here’s the surprising part – despite these temporary falls, the market bounced back to finish with a positive return in 18 out of those 24 years. That’s 75% of the time. Just last year, the market fell over 8% during the year, only to finish up more than 23%.

Much like a toddler’s meltdown, markets can experience sharp declines, but they can also recover just as quickly. From a portfolio management perspective, the key is understanding market drivers – knowing when to react and when to tune out the noise. Markets often give false sell signals and reacting emotionally can lead to costly mistakes.

Key takeaway

‍Don’t let a market tantrum derail you from achieving your financial goals. Volatility is the price you pay for returns. History shows us that staying invested rewards the patient investor over time.

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This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.