When I originally wrote this article about a week ago, the markets had not yet hit the lows that we see today (Thursday). I understand that there is a lot of unknowns out there. This is scary. I don’t want the tone of this article to sound flippant. But the information holds true.
I am going to try to separate irresponsible and hyperbolic investing advice from legitimate resources which are acting as the voice of reason.
I think one of the most important concepts on market capitulations in times like this is the concept of “myopic loss aversion.”
The concept is very simple. Losing money feels twice as painful as making money feels good. This is built into our DNA.
Numerous studies have been conducted which reproduce this idea over and over again. Losing $10,000 in the stock market feels far worse than making $10,000 in the market feels good.
Remember when the stock market went up 32% last year? It felt good, but it was not cause for you to dance in your living room. Now that the stock market is going down, the feeling you have is so much stronger. Some people lose sleep. It hurts deep down.
To quote Peter Lazaroff:
“Myopic loss aversion is the idea that the more we evaluate our portfolios, the more susceptible we are to loss aversion….investors that check their portfolios less frequently are less likely to make bad decisions stemming from fear-based loss aversion.”
Do not look at your portfolios. Do not pay attention to what the stock market is doing (which is almost impossible these days- it’s on every screen in America). The more you look at your statement the worse investor you become.
Let’s look at what Vanguard has to say (probably the most highly respected name in the investing industry).
“I know how difficult it is to see hard-earned savings diminish, but don’t be tempted to time the markets. It’s a losing strategy. Our studies have shown that chasing returns has historically destroyed 1.5% a year versus staying the course.” (Vanguard.com)
“Even from the pre-crash peak in 2008, stocks are still up almost 90% over the past dozen years and a few months. Moreover, when you look closer, you can see a lot of spots on charts where stocks fell sharply since 2008.” (The Motley Fool)
“Resist the urge (to sell). Money is made at turning points, and the crowd is rarely right at critical moments. Why? Because 50% to 90% of daily volume is driven by the trading algorithms, not by human investors with long-term time horizons.” (USA Today)
“Looking at data going back to 1930, Bank of America found that if an investor missed the S&P 500′s 10 best days in each decade, total returns would be just 91%, significantly below the 14,962% return for investors who held steady through the downturns.” (CNBC)
“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.” (Warren Buffett)
I have to admit, that in my 18-year career this is some of the most incredible volatility I have ever seen. As more speculators enter the market, the more they try to time the market, which makes the market act more like a roller coaster.
But you are not a speculator. You are an investor. You understand the power of stocks of bonds. You understand that over the next 5, 10, 20 and 30 years a diversified portfolio of stocks and bonds will make money.
I write these articles because I care about my readers. While these are uncertain times, take comfort in the fact that the human spirit wins every time.
Please share this article so that your friends can worry less.