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Don’t run away, just walk!

Published at: 12-03-2022

Posted on: March 12th, 2022 by RaduC No Comments

Fleeing or rapidly moving away from danger is a response deeply imprinted in the animal subconscious as a way to ensure the survival. In any species of any size, sensing an imminent life-threatening danger triggers automatic, instinctive responses that cause the individual to quickly turn away from the peril. For tens of thousands of years, this has been a defense mechanism for humans, too, meant to protect their life.

The issue with such a reaction, deeply rooted in the subconscious, is that it exceeds any rational behavior. Under such circumstances, a quick response is critical for survival and therefore we have been “programmed” to no longer wait for the “voice of reason”. Hence, problems may arise that lead to outcomes that are the exact opposite of what we intended.

For instance, when crowds of people are faced with hazards like fires or storms, a sizable number of the victims are the consequence of herd behavior, causing many people to get crushed or trampled. Often times, this results in jammed exits, which only makes things worse.

Panic is the prevailing feeling in situations like this, it becomes dominant and stifles the voice of reason. And this type of behavior takes different shapes and forms that are sometimes aberrant, regardless of the context that caused the panic. Large amounts of cash in hard currency are withdrawn, ignoring the risk associated with handling and keeping it, people stock up on toilet paper (?), buying or taking medicines uselessly or waiting in crazy-long lines for gas without an obvious, objective reason.

The panic or the fleeing may become manifest on the financial markets, too, and the volatility we are witnessing these days is the consequence of the herd instinct, a herd guided either by fear or by greed. Nota bene, even the seasoned investors may be unable to steer away from the unreasonable instinctive reactions when faced with rapid developments whose consequences they cannot assess quickly enough. We need to be aware of such things, even more so as the population is largely made of amateur, not professional investors.

Which is why I am writing this in an attempt to make as many people as I can understand the losses they might take on by hastily withdrawing their savings from the investment funds. For instance, many are understandably concerned with the negative developments of such funds that accurately mirror the financial market trends. But what many ignore is the fact that these “losses” in their portfolio are “unrealized” losses, meaning simply on paper, and will be reversed as soon as the markets bounce back. Those who did not panic and remained patient, whether in the 2008 crisis or the 2020 pandemic, did not regret it. The markets bounced back and so did the value of their investments.

Yet, when panic-stricken investors withdraw money from these funds, the losses incurred are no longer purely on paper, but they immediately transfer to in the investor’s cash. They become “realised”. Unfortunately, I know people who, under the influence of panic or fear, took such decisions in the attempt to protect their savings. The result was the exact opposite.

Those who manage to keep a clear head realize that, in fact, during such times, instead of disinvesting, it may be better to keep investing because you have the chance to buy assets/shares at very low prices. (Some of you may have heard of Chinese businesses interested in buying Russian assets now, taking advantage of the fact that Western companies and investors leave Russia and the prices of Russian shares collapsed).

All these ideas, the call to make rational judgments are not for the participants to investment funds alone. They also apply to people over 60 who must decide whether to take out the money from the voluntary pension fund now or later or to those with bank deposits thinking of withdrawing the deposited funds in cash.

In times like this, keeping a clear head is a challenge. First, one must be aware of it. Then, one must ask for an informed opinion.

In the end, make your decisions while “walking” cautiously, not “running away”.

Have a nice weekend!

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