Despite the volatility of financial markets, Diego Wuergler remains passionate about understanding the forces that shape them — from demographics and geopolitics to societal shifts. He has worked for Julius Baer for roughly two decades and oversees the Investment Advisory team worldwide, with teams in Zurich, Lugano, Geneva, London, Dubai, Monaco, São Paulo, Montevideo, Frankfurt, Monaco, and Santiago del Chile. Throughout his career, he managed to accumulate a lot of knowledge about financial turmoil.
What is a market correction?
“A financial crisis is defined by a sharp market correction of around 40% to 50%, in contrast to a typical market correction, which generally ranges between 10% and 15%,” explains Diego. A correction usually lasts only a few weeks or months, often acting as a necessary adjustment for financial markets. It is driven by the constant inflow of new information, both positive and negative, which forces the market to adjust accordingly.
When asked how often such crises occur, Diego explains: “Over the last 25 years, we’ve seen three of these major corrections. So, we can do the math. Roughly every ten years, we might expect a significant market downturn.”
Navigating stressful market environments can be challenging. “In my experience, investment mistakes often derive from inadequate financial advice or emotional biases that lead individuals to cling to their narratives,” Diego points out. To avoid these blunders, it is essential that investors continually challenge themselves, actively listen to what the market is indicating, and adjust their strategies accordingly.
Diego’s top five common blunders that investors may encounter during a crisis:
Mistake 1: “Let’s sell for now and wait for the dust to settle.”
The equivalent for cash-rich investors would be, “Let’s keep the cash and wait for the dust to settle”.
Diego’s alternative view: Instead of panic selling or waiting too long, it is much better to build a solid exposure structured around well-defined, long-term investment themes from the beginning. Examples are investing in US stocks, automation & robotisation, cybersecurity, energy transition, artificial intelligence and cloud computing, longevity. As these themes represent structural, long-term trends, short-term market corrections should not be able to destroy the underlying rationale.
Mistake 2: “The market is wrong.”
It is not the market that is wrong, because we, as individuals, are wrong. At any point in time, the market simply discounts all public information available (the fundamentals) as well as investors’ psychology (momentum).
Diego’s alternative view: Never fight a trend. Most of the time, we understand several weeks or months later why today’s market trades at current levels. It is better to listen to what the market has to say to us and only when a trend changes should we adjust accordingly. The current secular bull market started in May 2013. On average, this period lasts 16-18 years.
Mistake 3: “This time is different.”
This belief is a common pitfall in investing. We may have felt this way because not so long ago, we experienced an unprecedented global pandemic, but the context is always different. For instance, during the tech bubble of 2000, sky-high valuations dominated the conversation, while the financial crisis of 2008 was marked by the financial system’s collapse, not the market itself.
Diego’s alternative view: What never changes in a financial crisis is our behaviour or our reaction, which is always based on greed and fear. Once you understood the nature of market corrections, it becomes much easier to control your emotions and avoid making counterproductive decisions.
Mistake 4: “I cannot sell this stock at such a loss. Let’s keep it for a while and see what happens.”
Avoiding a loss (and keeping zombie stocks) is one of the worst strategies ever, in Diego Wuergler’s opinion. Normally, “what happens next” is absolutely nothing as these stocks go nowhere.
Diego’s alternative view: A crisis changes the world. It clearly defines winners and losers, so be quick at selling the losers. Don’t keep the cash but reinvest into structural winners. An unrealised loss is still a loss. As Julius Baer’s Deputy CIO Michel Munz also pointed out, the best way to quickly recover from previous losses is to make sure that what we own now will outperform in the future. A crisis changes the world. It clearly defines winners and losers, so be quick at selling the losers.
Mistake 5: “Buy low, sell high.”
This is a fundamental lesson in finance and economics: the reality is that you can only determine when a stock is at its low or high after the fact, making it difficult to time your buy and sell decisions accurately (see Why timing the market is the wrong approach). Particularly in a positive market environment, you tend to have a contrarian approach and only buy stocks that trade at a low level. Unfortunately, they often trade low for a good reason so you buy what you should avoid (see mistake 4). Alternatively, what’s much worse is that you may wait for the perfect moment to buy low and miss out entirely.
Diego’s alternative view: A much more effective strategy is to “buy high, sell higher”. If this is the right stock within the right investment theme, it is not that important if you buy it at a “high” level.
“We are not robots; we are human beings. Being a human being, you have emotions, which naturally creates a lot of bias,” explains Diego. This emotional factor often manifests as loss aversion, where investors are hesitant to sell assets at a loss. As a result, they cling to underperforming stocks while neglecting their more successful investments.
So apart from avoiding the five most common investment blunders, which final advice can Diego give us?