Opinion – From Grain to Grain: We simulated two strategies and the result is that your instinct can harm you

Our instincts can lead us to wrong investment decisions. When faced with devaluations like the ones that occurred today in the stock market, most people instinctively want to sell. I explain how rationality can be more profitable.

Today, the Ibovespa, the main stock index on the market, fell by 2.6%. The market is no longer giving the president-elect the benefit of the doubt.

At this moment, fear dominates and the natural instinct is to run. In the financial market, this instinct translates into selling.

In the past 22 years, there have been 308 days when the market has dropped 2.6% or more. This represents only 17% of the total days in the period, that is, it is an event with low frequency.

The graph above shows the frequency of days for each Ibovespa variation range. The part in red represents the days with a decline worse than or equal to 2.6%.

I simulated two strategies in which the investor invested the same amount over the last 22 years. In both cases, R$ 261,800 were invested over the 22 years.

What changes in both strategies is when each investment is made.

In the first case, the investor invests in the Ibovespa only when it falls by 2.6% or more. In this case, he made 308 investments of R$850 over the period.

In the second case, the application is made every day, except for the 308 days of the first case above.

In other words, we simulate the result of a frightened investor who did not invest on the downturns and that of a rational investor who only invested on the downturns like today or worse.

The result of both strategies is shown in the chart above.

I’m sure you can already imagine which of the two investors had the better result. The difficult thing is to hold on to anxiety and act rationally in these moments of stress in the market.

The investor who bought the falls invested a total of R$ 261.8 thousand and today would have R$ 1.05 million. Therefore, the invested capital was multiplied by four.

The investor who was scared by the falls had a 33% lower result and ended the period with only R$ 789 thousand. In this case, it only multiplied the invested capital by three.

The next time the Ibovespa drops sharply, keep this result in mind, try to control your instincts and act rationally.

Michael Viriato is an investment advisor and founding partner of Investor House

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