There are a lot of reasons why people swear off of investing in the stock market. A lot of stigma arises from the fact that investing in the stock market is gambling. This perception happens because the stock market is such a liquid marketplace which means that money can be made and loss in a matter of seconds just like a casino. Everyone knows that in the long run a casino will always end up taking your money. That same principle is often applied to the stock market. The most popular belief among the doubters is that the market will eventually crash to zero and everyone will lose their money.
All of these beliefs are usually sensationalize through the general media to make us even more emotionally imbalanced. This often leads to to many poor decisions that are made by average investors that hurt them in the long run. Once someone has that bad taste in their mouth from investing, usually they vow to never return.
Don’t Buy High and Sell Low
This type of behaviour from investors has gone on for as long as a stock market has ever been invented. Just like any other event in life, people tend to jump on the bandwagon when things are going well. Just look at professional sports teams, or popular music bands. When the momentum builds, everyone wants to be a part of it because it’s popular.
Stock markets tend to have a similar effect on individual investors. When the stock market is hitting all time highs, more and more investors continue to pile more money into it. The result is that the majority of investors are more likely to be buying at the most expensive prices.
The converse becomes true, since most investors put their money in the market when it’s at its peak. The inevitable bubble that forms and pops causes the masses to start selling as the market falls. This is like trying to catch a falling sword. No matter what investors do it’s going to hurt. Most people that do sell, generally sell at the bottom of the rout. These are the individuals that vow never to return back to the stock market because it’s rigged against them. In this case, the only mistake these individuals make is that they bought and sold with their emotions. Victims of buying high and selling low.
In an ideal situation, the stock market should reflect the valuation of the companies that makes it up; however, the reality is that a part of the market, whether negative or positive, coincides with investor emotions. No matter how someone tries, it’s impossible to put a price on emotions.
Every now and then the stock market gets way too ahead of itself. This is because the general feeling from investors is that everything must go up. “It’s gone up for the last 3 years, it must continue rising”. Those are the famous words of any speculative investor. Until the day the market corrects.
Corrections are a necessary evil of investing. It reigns back the excess that develops in the marketplace because of all the speculative buying that happens. Companies that actually don’t generate any profit or wealth for their investors are the ones that get hurt the most during corrections. Why does this happen? As I’ve said before, the market should be reflecting the values of the companies that it represents. Stocks of companies that don’t earn any money are essentially worthless. If an investor doesn’t get a return on their investment, then why would someone want to own it?
Just how common are corrections? Well in 2011 we experienced something similar to now.
A 200 point drop happened on the S&P with the US reaching its debt ceiling and Europe’s economy in turmoil. This wiped out more than 10% of the market’s value. Newspapers were running articles that 2008 was upon us again. The doomers were saying that the market was heading to 0 and those that didn’t get out would lose all their money. Experts told people to sell and get out. So what happened? The summer months faded. 6 months later the market regained its footing and started to head higher.
The S&P has risen past 1900 since then. Those that got out and vowed never to invest in stock markets because of ponzi schemes and greedy bankers are forever bitter at their decisions. See how emotions can get the better of you?
Stick To A Plan
Don’t become a victim of emotions when it comes to investing in the stock market. The key is to remember why the investment portfolio was created in the first place what the goals were when it was originally created. Stick to those goals. Stay with the plan.
Use techniques such as dollar cost averaging and rebalance your portfolio to smooth out the bumps. Even in a bear market, those techniques will help you weather the storm in the long run. Most importantly, don’t worry too much. Let your portfolio work for you. There are many more interesting things to do in life than watching the money in an account.