Amid Market Turmoil, 'Emotional Control' is Key for Investors
As international tensions in the Middle East destabilize global financial markets, investors are focusing on building an investment framework that is not swayed by emotion. Global financial markets have seen increased volatility due to war concerns, with commodity prices fluctuating in tandem with supply chain instability. Market participants are closely monitoring market trends and seeking response strategies. The attitude of investors blocking out emotional noise and maintaining the principle of consistency is being highlighted as crucial.
According to Daniel Kahneman's research on loss aversion, humans perceive the pain of loss more than twice as strongly as the joy of profit, leading to a tendency to opt for instinctive panic selling rather than rational judgment during market downturns. Investing late during market overheating or selling assets at a low point when fear dominates are cited as threats to asset management.
To overcome these cognitive biases, systems that operate according to pre-determined principles are being utilized. The discipline of adhering to a set rebalancing cycle, aligned with one's risk tolerance, is employed as a method to escape psychological biases.
Asset diversification using correlations is a strategy to offset shocks when a specific region or industry is hit, or to build a defense system by holding assets that move in the opposite direction. Harry Markowitz, a co-recipient of the 1990 Nobel Memorial Prize in Economic Sciences who laid the framework for modern financial economics, analyzed that portfolios considering the correlation between assets can pursue lower volatility with the same expected return. Long-term time-series analysis has shown that portfolios including assets with low correlation to stocks, such as the dollar, gold, and government bonds, can reduce volatility by up to 30-40% compared to single-asset portfolios.
The purpose of holding safe-haven assets during geopolitical crises is to ensure the portfolio's survivability, and the momentum for recovery after market stabilization also begins with diversification. It has been observed that missing the top 10 days of returns when investing in the S&P 500 index for 20 years from 1999 onwards can halve total returns, and missing 30 days can lead to negative returns. Investors examine returns relative to risk taken and review the maximum drawdown their portfolio can withstand.