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The odds of being at the sharp end of a shark attack are about 1 in 11,500,000.
But we don’t always base decisions on probability. We often base them on the first thing that comes to mind—and because of that, anything that’s recent or dramatic jumps to the front of the line. It’s why we might avoid the water during TV’s “shark week.” And it’s why a decade-old market downturn still has some investors watching from the shore.
This is the latest in Franklin Templeton’s series, “Behavioural Finance for Everyday Investors”, where we describe common investment barriers – so you can overcome them.
For many investors, it doesn’t get more dramatic than the 2008 financial crisis. The S&P 500 fell 37%, still the worst one-year returns in the history of the index.
A year later, the markets roared back (the S&P 500 closed 2009 up 26.5%). But when it comes to perception, it’s hard to compete with carnage: in January 2010, we asked Americans how they thought the market performed in 2009. Two thirds of respondents thought it was down or flat.
A DISCONNECT BETWEEN PERCEPTION AND REALITY
When we base our decisions on perceptions instead of facts, we’re bound to make mistakes. This may explain why, over the past 10 years, the average investor hasn't done nearly as well as the index.
These charts are for illustrative purposes only and do not reflect the performance of any Franklin Templeton fund.
Sources:
Investments entail risks, the value of investments can go down as well as up and investors should be aware they might not get back the full value invested.