It truly amazes me how predictably irrational human beings can be (myself certainly included at times).
We like to think of ourselves as logical and rationale creatures, yet our actions beg to differ. Nowhere is this more apparent than in the stock market. We have centuries of evidence that tells us that markets go up and markets go down – sometimes quite drastically. Yet we also know that every single time that markets have crashed, those who ignored the noise and held on always do better than the folks that panic. And still, this past week, the newspaper’s financial headlines were dominated with ridiculous phrases meant to press the fear button, and people responded in weird and wacky ways.
Click Here to Ignore “This Time Is Different”
Despite consistently preaching from the ignore-the-noise & investing-for-the-long-haul prayer books, I had several folks email me this week in tones ranging from very disturbed to severe panic and frustration. They had done the math and realized they had “lost thousands of dollars off of their net worth”. To these folks, it bears repeating how this whole stock market thing works. If you own shares or units (in the case of ETF or mutual fund investors) and they go down in value, you do technically have a lower net worth; however, you still own the same number of units/shares as you did the day before, and as long as you don’t need the money any time soon you can be reasonably certain that a well-diversified portfolio will continue an overall gradual ascent pattern over the long haul as it vacillates up and down erratically in the short term.
Up, Down, or Sideways
I make it a point to try and rip off things smart people say in the hopes that I bask in their reflective glory. One such nugget of wisdom that I routinely spout originated with Preet Banerjee (or at least that’s where I heard it first) and he states that when people ask him which way a stock, interest rates, or “the market” is going to go, he tells them that he knows exactly – they will go either go “up, down, or sideways”. In other words, if you listen to people that claim they can predict where this stock market is going in the short term, you should be listening purely for entertainment value, because their largely full of BS. Continue Reading