Last month, the US equity market set a new record for the longest bull market (period without a 20% drop) in history. There’s not much euphoria around, but in case anyone is tempted to get carried away, allow us to offer a sobering thought…
Have investors forgotten what it feels like to lose money?
Equity investing is risky. You can lose money, potentially lots of money. In economic and political terms, it is easy to see lots of risk out there. But equity markets have been behaving rather differently.
Last year was the first time in 35 years (which is as far back daily data allows) when there wasn’t a single seven-day period where US equities fell by more than 2%.
It’s a reminder of the calm progress made by shares last year. But it also raises the possibility that investors may have forgotten what it feels like to lose money.
This is not normal. I repeat. This is not normal. Investors need to beware of complacency or falling prey to “recency bias”, a common behavioural trap where the future is assumed to be like the recent past.
Risk means more things can happen than will happen. Just because you didn’t lose money last year doesn’t mean you can’t lose money this year.
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