Everyone loves the feeling of making money. To invest in something and see the number get bigger and bigger, very few things in life can provide that thrill. Not only does it mean you can buy more things and maybe retire earlier, but it provides us a sense of security to know the system is working as designed. Your hard work is paying off.
The last few weeks’ market correction have reminded everyone, quickly, that markets can go down. To quote a common Wall Street line, the market takes the ‘stairs up, elevator down.’ We have moved up slowly, with very little volatility, for two years straight, and even more broadly, for 9 years straight, since the bottom of the financial crisis in early 2009. People, expectantly, have forgotten what it feels like to lose money in the market. Then seemingly overnight, the market drops 10%.
If you haven’t noticed, good for you! Turn off the TV and read a good book, skip the ‘Markets in Turmoil’ headlines. The rest of you, may I suggest, that this is what it feels like to make money.
If you were in the markets for the crisis of 2008-2009, it felt like the world was going to end. During the spring of 2009, with the market down 50% from its highs, it seemed impossible that anyone would ever make money again. But the money you invested then, in the depths of despair, is now worth about 350% more. In less than ten years your investment more than tripled in value.
A lot of people will wait until things ‘feel good’ to invest. This is not a very scientific, or successful, strategy. As Mike Philbrick from ReSolve Asset Managment once said, ‘excess return lives where you don’t want to go.’
You have to buy something at a low price to make money. More specifically, you have to buy something at a lower price than someone else is willing to eventually pay you. If you have a great investment, it’s only great if you can actually sell it too. Otherwise, what do you have? If you can’t monetize your investment, it remains a paper value, and thus, worthless to you in real life. By definition, markets require buyers and sellers.
In the long run, the money is made when there are lots of sellers and it feels terrible to buy. In a room full of people all selling stocks, you’re going to feel like a fool to buy something. To quote my friend Wes Gray from Alpha Architect, “for an investment to work it has to suck.”
So what do you do in a market correction?
First, it’s normal for it to feel terrible. You’re human! Because we all suffer from anchoring bias, we’ve all gotten used to seeing those all-time high values!
Second, forget about trying to ‘figure it out.’ Markets go up and down as fear and greed play out real-time. You don’t know where it’s going tomorrow…and no one else does either.
Third, examine your tolerance for this type of thing. ‘Risk Tolerance’ is a term that the finance industry loves to throw around to try to fit us all into neat little buckets with tidy questionnaires. Life is anything but a neat bucket. If your life is truly affected by a market correction, or you can’t help but check your account balance every 10 minutes, you have to be honest with yourself about what you can tolerate. No investment is worth losing sleep.
Finally, to quote Ben Carlson from A Wealth of Common Sense, ‘if you don’t have a plan of attack in place going into something like this, your emotions will get the best of you.’ If you’re invested in the stock market, it should be part of a broader financial plan that helps you keep perspective on short-term moves.
Recognize that these events will happen and understand it won’t be comfortable. Resist the urge to do something rash. Investing is a long-term game, and we all need a reminder once in awhile about what’s really important.
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