Should Stock Market Losses Scare You?
We all know the stock market has experienced losses recently. This isn’t particularly surprising; stock prices are based on the fortunes of business, and some years, business isn’t as good as others.
Still, market losses up to now have always been temporary; every stock market downturn in history has been followed by a recovery. So why is there so much anxiety around stock market losses? Why don’t investors say, “This is a short-term problem,” and get on with their lives? Why do so many people lose sleep when their stock investments lose value? There are several reasons.
For one, our screen time has trained us to worry about market downturns, reinforcing the falsehood that stocks require immediate attention when values are dropping. Films from Hollywood’s golden age show rich and privileged men (usually men, anyway) making frantic phone calls to tell their brokers to buy (or sell) “immediately!” And of course, we can’t forget how when George Bailey’s building-and-loan depositors were panicking, he implored them not to hurriedly sell their shares to Mr. Potter. Hollywood’s view about finance has long seemed to be all about urgency.
Most modern-day news programming doesn’t do much better. Instead of helping us understand that urgency is the enemy of long-term investment success, they do the exact opposite. To sell advertising for profit, news outlets provide a non-stop stream of sensational, melodramatic headlines that are designed to trigger viewers’ emotional responses. This can encourage viewers to act hastily (which is great for an advertiser trying to sell a product, but terrible for an investor).
If, instead, the financial news said, “Keep calm, this is only temporary, just like every time before,” it would mute the emotional response that is the media’s lifeblood. And of course, the content of the news itself is dependent on “the latest,” which is by definition whatever has happened in the last few moments. This viewpoint just isn’t compatible with providing reasonable long-term guidance for the investor. Can you imagine a broadcast news outlet giving the same “keep calm” advice over and over, year after year—it’s the polar opposite of “the latest”—without a steady diet of anxious headlines about how much money everyone has lost?
Human psychology is also a factor. Most of us have an aversion to loss; those who study behavioral finance find that we feel a $100 loss more than we feel a $100 gain. Or as Yogi Berra is quoted as saying, “Losing hurts worse than winning feels good.” So it’s only natural to feel concerned when your assets lose value.
Still, we continue to believe are several reasons that there’s no need to feel alarmed about market downturns:
Your investments that are in mutual funds that own stock are likely among the longest-term investments that you have. They’re not to be measured in seconds or hours, but in years (or even decades). When you bought them, you planned to keep them for a long time. (If you didn't, you were speculating, not investing.)
As investors, we benefit from the big picture, not the developments of the last 15 minutes. This is why we don’t try to predict what’s about to happen—the economy has so many moving parts that even experts can’t predict it well or consistently. More importantly, to be a successful investor, you don’t need to predict short-term stock values.
Since our clients’ portfolios are diversified in multiple different ways, we’re confident in their stability. Any single investment that could “go bust” so dramatically in the movies is merely a tiny fraction of the mutual funds we recommend for the majority of our clients’ stock investments.
Diversification goes beyond mutual funds that own many different stocks. It’s also about having various types of assets, not just stocks. You’re probably not planning on spending the money from your stock funds anytime soon; that spending will come from cash, and your bonds will be next in line. So, your stock investments will have plenty of time to recover their value after a downturn.
Dealing with the stock market can be a lot like dealing with a rainy day. Some cloudbursts last longer than others; some are more serious, others less so. But even a terrible flood doesn’t last forever. Of course, before the rain, you didn’t ditch your umbrella just because it was clear out. You planned for rainy days, so you didn’t fear the storm. And of course, you knew that, eventually, the sun would always return.
We remain confident that it always will.