Nothing stings worse than losing money.
Investing is an inherently emotional process that encompasses the full range of feelings from greed and exuberance to fear and avoidance. Interestingly, when it comes to money, negative feelings are much more powerful than positive emotions. Behavioral economics researchers, who study our emotional connection with money, have discovered that losing money feels twice as bad as making money feels good.
But as we work our way through this correction, remember that it is possible – and vitally important – to control our fear, lest we make impulsive or irrational decisions.
Corralling scary thoughts is difficult, I know. I know it from both my clients’ experiences and my own. Our emotions can seem like unassailable drivers when it comes to investing. As a CERTIFIED FINANCIAL PLANNER™, part of my job is to inject rationality into an emotional situation, such as the one we are currently experiencing.
I get it. Fear is powerful – it’s deeply embedded in human psychology, and it has its place. Early human’s fear of crop failure drove them to create stockpiles. A child who touches a hot stove is rightly (and safely) afraid to do so again.
The problem with fear comes when there is no rational basis for the emotion. This is too often the case with investing. A run-amok fear of losing money can lead to such impulsive decisions as jumping out of the market just as it’s about to recover. (On the flipside, there is the fear of missing the current “hot stock” can lead to equally imprudent investment decisions.)
Control the fear.
Corrections are scary. And they can create a fear spiral. But this is not the time for knee-jerk reactions. This is a time to stay the course, while perhaps reassessing your holdings and risk tolerance. Remember that investing is a marathon, not a sprint.
More prudent investors will play the long game. They will stay the course, which will most likely mitigate the effects of a correction on their portfolio. Investors with less vision stand to lose big because they’re constantly jumping in and out of the market in reaction to downturns and upheaval.
What’s more, corrections aren’t all bad. Sure, they can cause pain, but they also offer an opportunity. A correction can be a great time to get your hands on high-quality stocks at “sale” prices.
For better or worse, the market holds such “sales” on a regular basis. Corrections happen pretty frequently (about once every 357 days). But they don’t typically last long – the average correction runs about 14 weeks or about 72 trading days.
Control the fear.
Don’t let this correction push you to go 30%, 50%, or, heck, 100% to cash because you are afraid to lose temporarily. The operative word there is temporarily. And, we all know that cash always loses; inflation erodes between 1% to 3% of our cash in any given year. Doing some math, ten years with cash at 2.5% compounded gives you an almost 25% loss. Twenty years will result in a loss of almost 40%. So, not investing due to fear will guarantee you a permanent loss. Now, if that’s not fear-inducing, I don’t know what is.
My advice in the current market is to stand fast. Corrections don’t last forever. They come, and they go. If you’re committed to a well-crafted long-term investment strategy, you should view these downturns as either blips on the radar or opportunities to get your hands on some high-quality stocks.
Investing is not for the faint of heart, my friends. But I believe in you. You can do it. Just remember my Number One Rule for investing: Time in the market is better than timing the market.