I love it.
A headline yesterday at CNNMoney read, Extreme Fear in the Stock Market.
You might think, “Oh no!”
I think, “Oh, yeah!”
Why? The first rule of winning in the stock market is to always work directly against your emotions. If you give in to emotion you’re probably going to lose, but historically, if you work against the grain, you do well.
I’m not just hypothesizing. In his book The 99 World’s Greatest Investors, Magnus Angenfelt shows that contrarians—people who go against the grain to find their positions—were some of the richest investors in the world. (You can hear Magnus and Joe talk about great investors on the podcast).
If you think about the cycle of investing, it looks like this:
Market Action / Your Thoughts
Decide to invest / “I’m feeling good”
Market gains / “I’m pretty good at this”
Market soars / “It can’t get better”
Market sinks / “I need to rethink my strategy”
Market tanks / “I’ve gotta get out”
Market gains …..
Isn’t this the cycle, not only of your emotions, but also of the popular media?
Let’s map the market cycle not from an emotional point of view, but from the view of the value of your investment. If you look at the markets historically, here’s the way it looked:
Market Action / Your Thoughts / Market Future
Decide to invest / “I’m feeling good”
Market gains / “I’m pretty good at this” / Diminishing returns
Market soars / “It can’t get better” / Time of biggest risk
Market sinks / “I need to rethink my strategy” / Increasing value
Market tanks / “I’ve gotta get out” / Time of least risk
Market gains …..
Isn’t it funny that your emotions run exactly the opposite of the market direction? What you feel and what you should be doing are generally polarized.
The Only Time To Fear Down Markets
…is when you’re ready to remove money. If you have money in stocks that you need tomorrow, you really messed up.
The Glide Path
I’m not the first person to write about “landing the plane” when it comes to your investments (and I’m sure I won’t be the last), but that’s because the concept is simple: move out of the market slowly during the five year period before you need the money. That way you can lock in your gains without worrying about market conditions when you need to spend some dough.
If You Can’t Get Over The Fear of Down Markets
…you have two choices: either quit investing in stocks or get educated.
When I was in college I was deathly afraid of flying. Every time we’d bank I’m worry non-stop that we were going to crash. We’d hit turbulence and I was sure that we were going down any second.
Then a friend of mine let me play around with his Microsoft Flight Simulator game. It was amazing. Since I learned the basics of flight, my fear has gone nearly away (I’m proud to maintain a healthy respect for the fact that I’m a guy without wings at 30,000 feet). Now when the plane banks I know we’ve made it to a VOR and are adjusting course. When we hit turbulence I know that it’s normal. When there are sounds from under the plane as we descend, I know an engine isn’t coming off….that’s the landing gear (something I’m glad has successfully deployed).
So, the point?
I’m loving the fact that the market might be giving me an opportunity to add more money fairly cheaply. We’re in “go” territory!
Photo: Jimee, Jackie, Tom & Asha
Interesting about the flying thing!! There is definitely some truth to the concept that knowledge is power, you know? I used to be terrified of down markets,now I’ve finally learned to understand that they mean opportunity.
That’s great power for you, Laurie, because you’re just getting ready to start your investing journey. Man, if I’d known some of the stuff when I was starting that I know now….sigh……
I wish I would’ve seen your blog post this morning because I wrote something similar and could’ve riffed off of this. I say bring on the fear. One of my future posts is going to be on secular bear vs. bull markets (I still think we are in a secular bear) and this fear we are having is a great buying opportunity before another multi-year market run!
Great minds, huh? Funny, I wouldn’t disagree, but I tend to be an optimist….but knowing that, I put safeguards on my portfolio just in case I’m wrong :-). Hopefully you’re right. Game on!
Just a guy
Can you share your CYA “safeguards”. I feel for people ready to retire in the next 5 years if they use the same gunslinger time to buy more advice. Was that the same advice most “financial advisors” we’re distributing in September 2008?
Great question, guy!
First, you should never, ever put money in the market that you need in the next five years. When I was a financial advisor we used a “bucket” approach. Money you needed now was in an incredibly conservative bucket. Money you need 5-10 years is in a more moderate bucket, while funds 10+ years were matched to the risk tolerance we needed to drive returns.
Some people have called this strategy too conservative. I think it’s actually the opposite. I don’t have to worry about my 10+ year money so I can be more aggressive than the person who tries to optimize all of their money in the market.
For me, additionally, because I want to be able to “grab the controls” during violent swings in the market, I have stop losses. However, stops are a two way street. You’ll sell when the market sinks, so you have to be willing to buy back again at some point. I like it because I follow the markets daily. I don’t like stops for people who are just afraid of the market because they won’t get right back in….something you MUST do to avoid huge losses.
I hope that helps.
Also, in 2008, if you didn’t panic, your financial advisor was absolutely right on if they told you to ride it out or buy. Holy crap, you would have made a ton of cash.
When so many people around me were complaining about how much they lost in some of the recent market downturns, I would sympathize and nod, but mostly think “how great is this for me”. I feel awful for those who were trying to retire when the market crashed, and I did “lose” some money, but the truth is, I was (and still am) in my 30s, with another 30 years or so until I intend to touch the money I’ve invested. Crashing markets now mean I’m getting new stocks for cheap, with a lot more potential for growth.
Now, when I reach my late 50s or 60s, I may think differently, but I’ll also likely be moving the money I’m counting on out of the stock market and into more stable investments.
Great note, Erin. The funny thing is….when you’re in your 60’s you’re in this enough that you won’t have money in a spot where you need it right away AND it sank. I’m always so sad when I read about people who lost tons of money they needed to spend right now because they had it in stocks….a horrible place to be for short term goals.