The stock market selloff in February and March proved yet again an important point about investors.
Not many would own up to it, though. Why? Because it would destroy their self-image. By the way, it applies equally to financial advisors and anyone else who spends time thinking about investments for a living.
So, what did the market prove?
That far more investors think they can take advantage of market drops than actually do.
We all know we are supposed to buy low and sell high. That part – the knowing part – is easy. It’s the doing that is difficult. Just like knowing to limit calories and increase exercise is a simple way to lose weight. Simple but not easy.
When the market falls, it is time to buy. We know that. But very few people follow through in the moment. It seems to me that instead of buying, too many people tell stories.
The stories paint a gloomy picture of the future. The stories go like this: “The market is down 20% and there is no end in sight. More businesses are going to close. The economic data is going to be terrible. I bet the market falls another 10-15% from here. I’ll wait for that to happen before I invest.”
In times like that, it is amazing the predictions people are willing to make. You will hear people say, “The Dow probably won’t bottom until it hits [insert some round, low number].” These people do not study the markets for a living – and even if they did, their guesses would be highly suspect. Even so-called experts rarely get it right.
Where do these guesses come from? Why do we believe them? I have no idea.
But those stories and guesses hold people back from doing what they know they should do. They serve as a convenient excuse for choosing inaction. They are the reason people fail to do the right thing, which is buy while the market is low.
As it turns out, we can weave together incredibly persuasive stories. And there may even be some truth to those stories. Investing involves risk, after all. It is possible the stories and reasons we concoct for not investing when the market is down could turn out to be true.
More often than not, however, they turn out to be overly pessimistic.
Here is how it often plays out in real time. Despite our reasons for not investing, the market turns up and we tell ourselves, “It’s just a temporary bump. It will come back down.” And then the market goes up even higher, and we say, “If it falls some from here, I’ll buy.” But it doesn’t. Pretty soon, the market has shot up a good deal higher and our money is left on the sidelines.
It happens all the time.
Looking back at stock market charts, it is a cinch to spot when to buy and when to sell. That is different than knowing how to act in the midst of a market meltdown. After all, a sergeant always knows the right moves after the battle is over. In the middle of the smoke and chaos, those actions are not nearly as clear.
The first step in overcoming our propensity for inaction is to recognize that we all tell ourselves stories. We all make up reasons not to invest. Again, those reasons are awfully convincing.
Having a plan is crucial. It can be as simple as this: If the market falls by XX%, I will invest XX% of my available savings. And if it falls another XX%, I will invest another XX% of my savings. But beware, emotions can trump even the best-laid plans.
From there, it takes courage. The best times to invest are when it feels the worst. Just know that if you can fight back the fear – and if you have a long enough time horizon – your actions will be rewarded.
There’s always going to be a reason not to invest. Don’t let that hold you back.