Halloween: a time of sugar rushes, creative outfits, and fear. Getting a good fright from creepy decorations or a loud “boo” never hurt anyone but what happens on Halloween needs to stay on Halloween. Getting spooked isn’t always a good thing. If you’ve been following the blog, you know that one of the worst things an investor can do is let emotion take over and fear is one of the worst culprits. In honor of Halloween, we’ve decided it’s time to come face to face with some of the things that regularly jump out of the bushes to spook investors:
The nature of the stock market is that it goes up AND down over the course of every single day, week, and year. But the nature of people is that we tend to focus on our losses instead of our gains. This tendency, called Loss Aversion, means that losing $10 seems like a much bigger deal to us than gaining $10. And sometimes, we’ll even choose to hold onto our $10 rather than use it to gain $20. Small losses are an inevitable part of stock market investing but sometimes they scare us enough that we bow out before we have a chance to profit.
Dramatic price movements can be scary because sometimes they’re signs of bad things happening. But it’s important to remember that sometimes they’re a sign of nothing at all. Let’s say a particular stock or index has been rising steadily for a month straight and then all of a sudden has a serious drop. The chances are good that the high price was the mistake and not the drop. In fact, in a lot of cases, even after the drop, the price is still higher than it was before the climb began. A big fall can feel like a crisis but the data doesn’t always support it.
The stock market moves minute by minute. That means that there’s always something to say about it. But that something doesn’t always matter. If you look at a stock price for a particular day or week, you may see that it’s not doing well and that can make investors anxious. But zoom out. A drop one day may be just part of a gradual upward trend over the course of months. Gains can be slow and gradual. If you take a short-term view you’ll be missing the most important parts of the picture.
FOMO, or Fear Of Missing Out, keeps us late at parties with people we don’t really like. It makes kids insist they’re not tired as they fall asleep in their plate of spaghetti. And it makes investors follow the crowd when they should think for themselves. Lots of people flocking to buy a particular stock doesn’t necessarily mean it’s a good one but it does mean that the price is going to go up based on demand. So by following the crowd, you may be following a false lead and you’re probably paying extra for the privilege.
“Experts” can be intimidating. But keep in mind that people who make their living as experts commenting in the media have to find something interesting to say every single day. But a lot of what they’re saying isn’t really important. And worse, experts often contradict each other which can cause confusion and lead ordinary investors to make befuddled decisions.
Lack of Control
Smart investing in the stock market requires a certain amount of trust. You’re taking a risk and you’ll have to let things play out. For some people that lack of control is terrifying. It can lead people to pull their money out when they shouldn’t or not to invest at all. You may have more control over your finances if you hide your savings under the bed, but in ten years, you’ll almost definitely have more money if you invest it.