The latest issue of Consumer Reports magazine features an article that looks at why infomercials(and the legend of Billy Mays) are so popular. These ads are carefully scripted to set-off a chemical in your brain called dopamine that typically leads to irrational, compulsive decision-making. This dopamine “high” only lasts for 5-6 minutes, hence the reason so many of infomercials tell viewers to “act now”.
What’s interesting is that dopamine has also been identified by researchers in the field of neuroeconomics (which combines neuroscience, economics, and psychology to study how people make financial decisions) as the cause for imprudent, short-sighted investment decisions.
Not surprisingly, dopamine tends to be released in the brain more frequently when market volatility increases. This is precisely why it’s so important for investors to always make rational, long-term investment decisions based on facts and strategies, not emotion.
With that in mind, to kick off your week I thought it would be helpful to provide you with a few market facts you might find useful:
- 2009 was the 22nd best year ever for the S&P 500 Index going back 128 years (as far back as data is available). The index however, is still 29% off its 2007 high.
- Despite rising over 30% last year, the S&P/TSX Composite Index is still about 18% below the high water mark it set in July 2007.
- Last year, the MSCI World Index rose 27% in US$ – its biggest annual gain since 2003 and proof that diversifying globally is still an important investment strategy.
- After peaking in November 2008, the VIX index – a closely watched measure of stock market volatility – fell 75% in 2009, a record annual drop.
- After an outstanding 2008, U.S. government bonds ended 2009 with their worst one-year performance in three decades. Despite this, and an improving environment for stocks, flows into mutual funds in the US are still running at five to one in favour of fixed-income assets over equity markets.
Although infomercials and investments are worlds apart, consumers and investors alike, need to make rational decisions based on facts and their long-term needs. For investors, a key success factor is having a well developed investment strategy, complete with rules in place. With a strategy, like investing in dividend growth stocks, you can turn to your stock selection strategy rather than Tony Little or Vince Offer – my personal favourite.
Slap Chop anyone?