Days of our investing lives

There is only so much excitement that an investor needs in their life.

Daily drama is better left to the world of TV soaps than your portfolio.

But sharemarket investors around the globe have had to deal with big daily moves - up as well as down - since August last year.

And if it feels an extraordinary time in terms of market moves then you are right. A detailed analysis of market moves from the end of December 1979 by Vanguard's chief investment officer, Eric Smith, helps put the recent market turmoil in a historical context.

He looked at all the daily moves that were either up or down by more than 2.5%.
When it comes to the positive side of the ledger there have been 37 daily rises above 2.5% since the end of 1979. On the debit side there were 52 days that the market value (as measured by the S&P/ASX200 and its predecessor All Ordinaries index) fell more than 2.5%.

Now let's look at the past nine months from August 1, 2007.

Given that the first quarter of 2008 has seen the steepest decline in the Australian sharemarket since 1987 it will not surprise anyone to learn that there have been 12 trading days when the market fell more than 2.5%. Easily the worst day was January 22 when the market dropped 7.05%.

But when you look back at sharemarket return histories there is another fact that emerges that tends to surprise people. Big falls and big rises tend to cluster together. It happened in 1987 and it has happened again with the recent turmoil. Take the long weekend in March as a case study. On March 19 the market was up 3.9%. The next day it was down slightly more than 3%. On the next trading day after the long weekend on March 25 it was up 3.7%.

These types of shifts highlights how ridiculously difficult it is to try and time markets.
Since August 1 last year there have 10 days when the market has gained more than 2.5%. The best day was January 25 when it rose 5.02%.

Looking at how the volatility of the last nine months compares in the longer time frame tells us we are in a period of high volatility - 22 of the 90 days since December 31, 1979 that either rose or fell more than 2.5% have occurred since August 2007.

So the market data confirms the emotional roller coaster that the markets have been on. But if you look back at the volatility for the previous three years it was historically low.

This is where the study of behavioural finance can help us as investors by changing the frame or context in which we are looking at things.

Extreme market conditions not surprisingly challenge people's ability to invest for the long-term. But the behaviour finance studies show that the time frame people view investing information through can dramatically impact their decision.

One research study shows that if investors are shown market returns on a monthly basis they will typically allocate 40% to equities. However, if investors are shown market returns on an annual basis they will typically allocate about 70% of the portfolio to equities. So short-term market information can make us quite myopic about our investments - potentially to our long-term detriment.

Sharemarket investors ought to expect one negative year in five. And just as we can never know with certainty what will bring growth markets to an end we also cannot predict what the spark will be that sets us off on the next growth cycle.