Overcoming Stock Market Fear

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Overcoming Stock Market Fear simple money man

Recently the stock market has experienced what many may call major up and down swings. A significant drop in the market means different things to different people. For many, however, this, produces fear.

 

For a long time, it would concern, frustrate, scare and stress me out. It was an obvious feeling in that hey I bought an investment to watch it grow and instead it’s shrinking. That was not my intention. But it wasn’t obvious to me that hey I’m in it for the long-term and, as history has shown, the market provides positive returns in the long-run.

 

 

Why So Fearful?

 

We are normally looking for deals and discounts everywhere; when we buy clothes, go to the movies, order pizza (the first question I ask Pizza Hut or Dominos is what deals you got going on), buying a car, and everything else far and between.

 

So why are we so afraid to buy stocks and funds when there are so-called discounted? Is it a psychological thing? The balance suggests that investors get excited when news comes out regarding a hot stock, this news then drives the price up and investors get in at a high price, thus overpaying.

 

And often times, our stock selling decisions are triggered by news in the opposite direction. That is, there may be a poor earnings report, a cyber-attack, or CEO leaving and as a result, this drives the stock price lower. However, this may only be a temporary setback in stock price. Consequently, investors get scared and decide to get out of the position before it drops even more. All the while, the financial fundamentals of the stock or company may be just fine.

 

A prime example is the case of Equifax. Their data breach took place in September 2017. During this period, the stock price dropped from ~$140 to ~$94 or almost 33%. Nowadays it’s hovering around $114, which means it is bouncing back:

Overcoming stock market fears simple money man EFX

 

 

There’s actually science associated with the fear of losing money.  Dr. Ben Seymour from the Wellcome Trust Centre for Neuroimaging at UCL (University College London) led a study involving a gambling game. When the subjects feared losing money, their brain’s fear centre, the amygdala was activated.

 

The pain was connected to financial loss as part of the study. Even though the study was performed in a gambling environment, the same feelings could be applied in the investing world especially when the market displays high volatility.

 

 

The Struggle Was Real

 

I remember back in 2008-2009 during the Great Recession, most days when I was off of work, I’d listen to the radio on the ride home. The financial report, in particular, was always a tough pill to swallow – a roller coaster ride for the stock market. I was hearing things like today, the Dow is down 700 points, the next day the Dow up 500 points, the next day the Dow is down again and this time 850 points, and then the Dow is up 400 points.

 

And it felt like at least a couple times a week, some company was announcing that it would be laying off hundreds of its employees or closing down a factory or some stores, or branches, offices etc.

 

Ofcourse, the people would could and wanted to cash out on their investments and maybe even their 401k; what if they needed to liquidate due to an emergency like a job loss. And with all of this in play, it’s no surprise that fear was a prevalent emotion.

 

 

 

How Can We Be Brave?  

 

The best way to be brave is to remove any and all emotions from your mind.

 

In the past, I’ve written about investment losses I’ve experienced. A significant one was concerning a solar company. The investment was highly driven by emotions such as curiosity, excitement, and greed. I didn’t know much about the company at all and relied on information that was fed to me by friends who were investors. As a result, I suffered a significant loss. I’m thankful for the learning experience and also the fact that I didn’t invest as much as others. It could have definitely been worse.

 

To be brave means to stay focused and regularly monitor the progress of our financial goals. For long-term investors, it should be adopting a balanced approach that takes a certain level of risk, but at the same time offsets that risk with safer investments.

 

To be brave means to understand the causes of our underlying investments performance or lack of performance. If underperformance is due to a so-called correction, but the investment itself is sound, continuing to deliver a profit, has a strong Return on Equity, and is paying a dividend – for dividend paying investments, we should remain calm despite a drop in the stock price.

 

To be brave means actually avoiding the temptation to constantly look at the stock market. When the market is up, there is a psychological feeling of happiness and comfort. Your investments are doing well, all the positions are in green, and the overall account is higher almost every day.

 

When the market is down, you see it and may feel angry, bitter, and confused. When this happens, just remember the long-term investment objectives or better yet, don’t look at the market activity every day, especially during a period of volatility.

 

As we may know, in a 10-year span, the stock market has resulted in positive returns.

Overcoming Stock Market Fear macrotrends simple money man

 

Source: Macrotrends

 

If all you care about are colors and numbers, just notice that on the chart above, there are more green lines than red ones and in larger percentages. Because this is proof that over-time the market will prevail.

 

Has the market behavior ever instilled fear in you? What have you done to calm yourself? Did you take action that you may have later regretted?

 

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13 thoughts on “Overcoming Stock Market Fear

  1. It will be volatile this year but I still believe that the stock market will end up positive in 2018. Low unemployment rate and a robust economic growth should be the contributing factor. My 2 cents.

    1. I agree. We’re already seeing the volatility and each time it happens represents a nice buy opportunity. I don’t believe in timing the market, but if you’re buying for the long-term, might as well buy in dips! 🙂

  2. Like you SMM, 2008 and 2009 was very tough emotionally for me watching our net worth and plans for financial independence get ravaged. But, it made me mentally stronger. The recent 10% correction was nothing compared to that time and it didn’t phase me a bit. Millennials have been slow to invest, but now as they get on board, many of them have never experienced a bear market. It will be interesting to see what happens when they do. If history is a guide, many will sell at precisely the wrong time, the bottom. Tom
    Tom at Dividends Diversify recently posted…So What’s With These Model Portfolios?My Profile

    1. It’s tough to change people’s behavior in terms of an up and down market. For me, when it’s down, I plan to buy and then literally look away. I was starting out in my investing life in the early 2000s so I was lucky that the crisis did not affect me that much. At the same time, I wish I had the wisdom and money to buy like crazy.

  3. Hey SMM,

    I made plenty of emotionally-driven investment mistakes back in the day. Then, I finally decided to trust that, as the data shows, the market (at least the major indexes) will always rise in the long term, as many decades of experience have shown.

    I don’t know about individual stocks, but with indexes, I think it’s pretty clear that a long-term approach will bring growth.

    Cheers,
    Miguel

    1. Yup; the numbers don’t lie. And that’s the best way to take emotion out of the equation. Apart from interest rates, with the recent dip, there wasn’t a pervasive reason why the market went down so much. That in itself presents a discounted opportunity to capture long-term growth.

  4. A really important article. Nailing the mindset when investing is the best way to earn killer returns in the time of maximum pessimism. As the saying goes “be greedy when others are fearful, and be fearful when others are greedy”

    Keep up the great work!

    1. Maximum pessimism…I like it. What we think is danger is really an opportunity. It’s all about training our brain to understand how these so called rough times in the market can actually help us capitalize larger gains in the future.

  5. As you alluded to with your Equifax example, dips in the market can often be great buying opportunities.

    If the company has sound fundamentals, it should bounce back.

    But, in a way you have to be thankful that some investors DO panic and sell, as if they didn’t… well, no buying opportunities for us.

    With big market wide falls, come bigger opportunities.

    And hold onto your hats, because the next crash is going to be mammoth!

      1. Yes, basically, you are right, markets are overpriced.
        A lot of that “growth” in the markets (and economies) in recent times has come from debt.
        Soon, companies and individuals will not be able to service their debts, and we’ll see an unwind.
        There will be lots of defaults and the markets will fall.
        I think it will be bigger than in 2007 because since then they have used more debt trying to solve the problem, and they’ve made it worse.
        BUT, not to be overly pessimistic, such moments are good buying opportunities for those in the right positions.

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