Your Brain Doesn’t Want You To Invest In The Stock Market – Here’s Why

Last week my wife and I spent a beautiful evening at the Peninsula Hot Springs. Although my favourite pool was the 38°-40° She Oak Barrel Bath, the Cold Plunge Pool intrigued me the most. Was it the uncertainty? Was it the challenge facing me? Whatever it was, I wanted to jump in.

Jumping into the unknown can make anyone nervous. It reminded me of the stock market. Sure, the She Oak Barrel Bath was warm, comfortable, and I knew what to expect. The Cold Plunge Pool on the other hand, uncertainty awaited me.

The human brain is millions of years old. It’s not designed to make you happy, it’s designed to make you survive, so it’s always looking for what’s wrong in a situation so you either fight it or flight from it.

We all know the stock market can crash at any time, and your brain will over-estimate this probability every day of the week – making even the most seasoned investors make questionable decisions.

Whilst it’s true, jumping into the stock market is never easy, yet the track record of the stock market is undeniable – a consistent performer over the long long. Although the stock market has trended upwards over time, investors experience negative returns around 31% of the time.

When looked at over short periods of time, the stock market can be extremely volatile. In fact, the stock market has lost between 30% and 40% in five different years (1917, 1931, 1937, 1974, and 2008), whilst it has gained more than 50%  twice (1933 and 1954), as see in the distribution chart below:

These wild swings begin to reduce the longer our time horizon. Consider the below animation, which looks at 1, 5, 10, and 20 year rolling periods. Take a look at the 1 year horizon, we see the best return of 53.20%, worst return of -37%, and volatility (ups and downs) of 18.20% – lots of red lines (losses).

Consider 5 year rolling periods. The best return was 28.50%, worst return was -11.70%, and volatility of 7.10% – much less red lines (losses) when looking at your investment over a 5 year period.

Consider 10 year rolling periods/returns. The best return was 17.60%, worst return was -4.10%, and volatility of 5.10% – only a handful of losses (red lines). Finally, consider 20 year rolling returns. The best return was 13.20%, the worst return was 0.50% (yes, a positive number), and volatility of 3%.

The longer the time frame, the less red you see. In other words, the stock market has not lost any money over a 20 year period.

No different to the Cold Plunge Pool, if you’re looking to jump into the stock market for a quick dip, you’re likely to have a poor experience. If however, you’re patient, resilient, and have the courage to brave the initial shock to the system, you will have a far more enjoyable and rewarding experience.

The stock market is a device for transferring money from the impatient to the patient

Warren Buffett

Source: The Measure of a Plan