Investors will unfortunately feel the excruciating pain of bear markets every now and then. The temptation during these turbulent times is to sell everything, run for the hills and sit on the sidelines. The reason is because as human beings, loss aversion is deeply embedded into our psychological makeup. The pain of losing money is always more powerful than the pleasure of making money. People simply don’t want to lose what has taken a lifetime to achieve, what has been gifted to them, or what has been derived from the sale of a home or a business. Seeing this money evaporate in a moment’s notice is more than gut-wrenching.
Here is your “Financial First Aid Kit.” Use it when you’ve been bruised, cut or scraped by turbulent markets and are struggling. These are nothing more than the basic rules of investing that have held up through thick or thin:
- Use history as a guide: Know that over longer periods of time, the markets always seem to recover. When they do, those who have capitulated (sold) will soon recognize that they have made a dreadful mistake. For that matter, those who dart in and out of the market actually face a statistical headwind because it has been proven that it is very difficult to time the markets. The books will tell you that a good part of the long-term gains in stocks is derived from only a handful of daily market moves. Missing those single days could result in a meaningful loss of long-term returns.
- Understand that compounded returns are not linear: You need to be patient during the difficult times. Stock returns do not grow to the sky forever. You must have a reasonable expectation of what your investments can generate over time. For example, a year (or decade) or so with out-sized returns can easily be followed up by the opposite behavior. The “two steps forward, one step back” environment is very normal and should be ingrained in your thinking.
- Accept that investing can be volatile at times: Investing has risk, plain and simple. The world faces natural disasters, acts of violence, and even pandemics on a regular basis. These unpredictable events can whack the markets without warning. BUT you should know that in return for taking on the risk of holding stocks, you are rewarded with strong returns over the long run.
- Always invest with a process and a plan: Even the most brilliant people will fail if they do not follow a preset process and a plan. Always go through a mental checklist: Does your plan make sense? Is it easy to understand? Have all the steps been taken to control risk? Does it have a history of success? If investing is not something you’re comfortable with and you hire a financial advisor, your number one priority should be to understand their process and plan.
- Focus on owning real businesses and stick with them: You want to own real businesses and real companies that play an important role in society. During periods of duress, there is nothing more comforting to own a collection of businesses rather than a portfolio of “pie in the sky” speculative plays. Instead, buy businesses and act like the billionaire who takes ownership in a company that will be bigger and more prosperous many years from now. Invest in companies that have sound management teams who have a commitment (rising dividends) to the shareholder over time. The wrong approach is to buy stocks simply because you think it is “going up” – without a thorough understanding of what it is.
- Understand that the world is growing: The world population is growing year after year and with that, most countries are consistently growing their GDP, too. This is actually a very simple way to think – but global population growth should trickle down to the companies in your portfolio. Know that there are certain times when there are temporary disruptions to world growth, unfortunately.
- Be a Time Traveler: Picture yourself traveling into the future sitting at your kitchen table, looking at your investment balances. Chances are, if constructed properly and managed the right way, the accounts should be larger than today. Maybe the balances could be lower in a year or so – but certainly not in 5 or 10 years! This simple exercise helps to control the anxiety in so many ways.
- Stay the course and avoid the noise: You are much better off following the rules mentioned above rather than getting caught up with all the rhetoric out there. The investment brokers are trying to create action within your accounts, the news journalists are trying to make a name for themselves by sensationalizing everything, and your friends are bragging only about their wins while never mentioning their losses. Focus on investing in good companies and avoid all of this madness. You will be much better off!
Conclusion: Stick with the First Aid Kit rules during the turbulent times. It should help when you are feeling despair. Even when things seem hopeless, history tells us that the economy and markets always seem to recover. The best thing you can do is take a deep breathe, think long-term, and accept that the market will have periods of volatility. It’s the nature of the game.
This is not an offer or recommendation to buy or sell any security and does not constitute investment advice.