Navigating a bull market can pose a lot of challenges sometimes.
Take 1988 for example. During that year, the US market was up 20 percent by the end of July, but it then gave up all the gain in the next two to three months.
But just when most people thought the year was going to end miserably, a huge fourth-quarter rally pushed the market up, helping it reap an annual gain of 28 percent and making 1988 one of the best years for Wall Street.
The swings show that although the market may in the end finish with strong gains, the volatility in between can be big enough to scare the hell out of investors.
Investors may get unnerved by the volatility and eliminate their positions.
It is therefore not quite meaningful to talk about impressive investment return of a market over decades and ignore the numerous and often big swings during the process.
After all, investors are just human, and we live our lives one day at a time. As people are emotional creatures, it is unreasonable to expect an average person to ignore short-term losses.
To be successful in long-term investing, patience and endurance are important qualities. But these attributes cannot be easily acquired just because one wants to.
Instead, people are prone to investment errors under the influence of fear and greed.
Investment theories make sense on paper, but when viewed within the context of ease of implementation by an average human, their usefulness has to be reexamined.
This article appeared in the Hong Kong Economic Journal on May 16.
Translation by Raymond Tsoi
[Chinese version 中文版]
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