Investors are shaped by their experiences. I’m an Australian under 30, and I’ve been investing since 2016. I have not experienced a prolonged recession, rising interest rates (until very recently) or the discomfort of high inflation. In September, I went overseas to the US and experienced a weak Aussie dollar for the first time. Prior to that, the majority of my overseas trips were to Sri Lanka which has dealt with a weakening currency for almost as long as I have been alive. All in all, I’ve had a pretty good run with investing.

I’ve read about recessions and studied their impacts, but I’ve never experienced one. Same with a bear market as let’s be frank, the one in 2020 didn’t count. As a result, the pessimism and cynicism that’s required to be a successful investor is imposed in an academic manner. I know about bubbles and that I should buy when everyone else is panicking. But I've never felt that panic. I’ve never felt the emotions of watching my portfolio sink day after day against a backstop of negativity about the future It’s tempting for someone who has never experienced real loss in the share market to venture further out on the risk spectrum. The fact that I haven’t been burnt makes me less wary of the danger.

I sought this risk through gearing in managed funds, and I hate to admit that I invested in ARKK. One turned out better than the other, but that was just luck – I could’ve easily been burnt by both.

This is very different to a person who started investing in the 1980s and 90s. They’ve experienced gruelling bear markets, recessions, and interest rate hikes. They’ve experienced what it’s like to have their portfolio drop by half. They’ve been in bear market territory before, and that has shaped the way that they invest.

We recently recorded an Investing Compass episode to be aired next month. Mark LaMonica expressed how the GFC has made a marked difference in the way that he invests. He said:

‘Personally, I don’t invest in financial services firms as individual companies, with the exception of one Canadian bank I've owned for a while. And the reason for this is getting burned in the GFC where I did not appreciate the risks of what I was investing in. Incidentally, it was obvious that the bank executives and the regulators didn’t understand the risk of what was happening. While that was a unique situation, I realised that I would never really be able to grasp the full spectrum of risks involved in these companies. But that is of course just me.’

My situation is similar to new investors that have entered the market since 2020. When you start investing in a period where everyone and everything is a winner, you feel like you have the Midas touch as every trade turns to gold. Although the volume of new entrants has not been seen before, bull markets tend to entice new investors. Each of these new bull market investors has felt the immediate rush of investment success before graduating into the healthy cynicism that acts as a safeguard from self-destructive greed.

The psychology of loss is such that it elicits more pain than the joy experienced from gains. Over the past few months, these new investors have started to feel pangs of regret and disappointment. Conditioned in March 2020 that shares will bounce back quickly there is a sense of impatience on investing forums and message boards. Well – where is it? Where’s the recovery?

Ultimately, you are going to face challenging periods as an investor, just as you do in life. Nobody would wish those periods on anyone, but the only way to make them positive as an investor is to make sure that you learn and do better next time.

What we don’t want to see is for the pain from losses causing people to turn away from what is needed to achieve their financial goals. Even as savings accounts appear more attractive the real – or after inflation – return is unlikely to be enough for most investors. The simple solution is to not treat investing as a speculator’s sport. Even if that is easier said than done. Experiencing poor years in the markets is inevitable, and this will make you a better investor. Focus on your goals and select investments that resonate with you and accept that as humans, emotions are always at play when it comes to investing. Each investment ultimately satisfies an emotional desire – whether that is a comfortable retirement, a holiday or children’s education. It is reasonable that we make flawed decisions, and it is those decisions that will build the foundation to successful investing in the future.