Brexit pushed the markets to wobble, shares to plunge, currencies to drop, and highly financially knowledgeable investors to stampede. I will not touch upon politics or this specific event, however recent affairs have fed my fascination with whether the theory of efficient markets and rational financial behaviour exist in reality.
Auto-didactic investors and those with financial education know the markets fluctuate and that nearly all asset classes show good growth in long-term (equities with best performance). Tactical Investor confirms this long-lasting trend. The dogmas that we all bow to, such as 'don't put all your eggs in one basket' and 'think long-term', are only partially followed. Why is that so? On a broad scale there are two types of investors - bullish and bearish. I am taking the liberty to split the investors in a different manner - those who are growing someone else's money, and the rest. On an individual level there is time. I can buy and forget, reinvest dividends and just aggregate wealth for the retirement or for the next generations. But big market movements make me question previous decisions. It is easy to experience a loss and cash out. The truth is - you cannot cover your losses if you stop investing. The only way to overcome losses is to keep investing. If you've got time, be patient and you'll have delayed gratification.
Those managing others wealth are more dependent on short-term market movements. Performance is looked at in shorter periods - investors want it all and they want it now. When the markets drop, the theory tells you: Buy cheap, eventually the price will go up. Banks and asset managers cannot afford to start catching a falling knife, they have to ensure short-term return. They have a separate rational market with a different time horizon. There are long-term asset managers - as well those who are less twitchy when a new wind comes - however large volumes of fund movements have an impact even on the bears in the caves. Markets do not entirely follow theories of rationality however it is worth thinking if different investors have a different rational market they trade in.
A market crash is a matter of perspective, and the masses always examine the situation with fear as their guide and stupidity as their master.