By Craig Erwin, Ph.D.
In the past two years stock prices climbed quite a bit. The S&P 500 climbed 26.61% last year and 15.76% the year before. That shows the danger of sitting on the sidelines. If you had kept your money under the mattress instead of in the stock market in 2020 and 2021, you would have missed out on a gain of 42.37%. Ouch!
This year stocks have been especially volatile and most stock prices have fallen. The S&P 500 is down 10%. Recently quite a few analysts and strategists have opined about the threat of a recession. Of course, whenever stock markets decline sharply, some experts predict doom and gloom just as some predict big gains when stock prices are climbing fast. But no one can predict the future consistently, not even experts. Sometimes stock prices rise when experts predict they will fall, and vice versa.
It’s natural to panic when markets decline sharply. Many want to get out of the stock market and they don’t care how much it costs them. The risk is that they will get out of the market and stay out. Too often those who panic and cash out never return or they sit on the sidelines until the market has seen big gains and then they jump back in as stock prices are peaking. What some perceive as a threat, others may interpret as an opportunity. When people sell because they are fearful, it is often a better time to buy than sell stocks. When everyone panics, it may well be an opportunity to buy stocks at bargain prices.
Timing the market is treacherous. That is why it is best to get in and stay in, no matter how bad things get. Eventually the war in Ukraine will end, the Federal Reserve will get a handle on inflation, and interest rates will stop rising. You don’t want to be on the sidelines when those things happen. If you sell everything now, that is exactly what is likely to happen. It’s financial suicide to sell low and buy high, but that is what many investors do, especially emotional ones. A couple of years ago stock markets were tumbling and people were fearful. Experts were predicting financial doom and gloom amid warnings of a bear market, which occurs when stock prices fall more than 20%. Friends and colleagues were telling me how fearful they were of a stock market collapse, even those who had no money invested in the stock market. What happened? The rough patch soon ended and it wasn’t long before stock prices hit new highs.
Following the crowd and allowing emotions, not facts, to drive your decisions, is a good way to lose money. It’s often wise to go against the grain, especially when everyone seems to be headed the same way. When everyone else panics, stay calm and don’t do anything rash or impulsive. It’s always best to focus on the long term and not be swept up by the crisis of the moment. Often the best thing you can do is nothing at all, especially if you are emotional and panicked, or greedy. If you do act, be sure to keep a cool head and do what makes sense for the long term. So, the next time everyone is running around and screaming that the sky is falling, take a deep breath, ignore all the craziness, and consider whether the crisis requires any response from you. It probably doesn’t. If you do nothing, you will likely be much better off than those who panic. Take a long walk and think about the things that really matter – your life, career, family, and health and happiness. Other than taking a walk, do nothing; absolutely nothing.
Somewhere down the road you will probably be glad you did.
Are you able to keep your cool when the the stock market is volatile? Do you buy and hold or do you trade stocks? Have you made investing decisions that you have regretted?
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