The stock market is a redistribution machine. It moves money from the hands of impatient investors into the pockets of patient ones. In this function, the market is extremely efficient.
Every investor knows that the stock market can be volatile. We have all seen historical charts, and we know the trend line is positive. But when volatility is experienced, many investors subconsciously allow emotion to override cognitive reason. The emotional tail ends up wagging the rational dog. This often leads to impatience, poor decisions, and investment losses.
Psychology shows that we make judgments and decisions by consulting our emotions. Despite this understanding, our decision-making process doesn’t change. Using motivated reasoning, we often attach to arguments that support our feelings and unconsciously disregard information that does not. We tend to draw our conclusions first and let the arguments follow.
Fear is a powerful emotion. Fear surrounding financial security can increase thoughts of terrible “what-if” scenarios. Focusing on negative outcomes, however improbable, can give them unjustified weight. This leads to greater fear and further cognitive impairment.
Investors undoubtedly face risks. To increase the probability of success, we must take all risks into consideration and mitigate them appropriately. But when risk reveals its ugly side, the correct response is often patience. Whenever you make an investment decision in a down market, ask yourself what is driving the decision. Is it fear or economic fundamentals?
When creating a financial plan, we do not expect positive returns year after year. We know volatility and down markets will have a significant impact. We work these events into the plan and implement protection strategies for when they occur. When the markets become volatile, it is time to depend on your plan, not abandon it.
There is a lot happening in the world that will impact your investment portfolio. The short-term future of the markets is unknowable. But the markets did survive WWII, the Korean War, the assassination of a U.S. president, the Vietnam War, the liquidity crisis, the prime rate hitting 21%, Black Monday, the Gulf War, 9-11, the Iraq War, the dot-com bubble, the financial crisis, and many other erratic and scary events.
In all these situations, fear was high, the future was in question, and patient investors outperformed the impatient ones. Having a suitable financial plan before the moment of crisis is key. Sticking to the plan is equally important. Just as in events past, the fear will fade, and markets will move opportunistically higher. It is patient investors who will financially benefit.
Listen to a deep dive about being a patient investor on the Power Up Wealth podcast.
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