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Controlling Your Fear of the Market
By JLP | September 11, 2007
There’s been lots of talk about the market’s recent volatility. Lots of otherwise stable-minded bloggers are blogging about the market and it is easy to tell from their posts that they are allowing fear to rule their emotions. No, I’m not going to point out which blog posts I’m talking about because they are my friends and it’s not my goal to make fun or belittle my fellow bloggers.
That said, I do think that people need to take a step back and look at the situation through a clear mind, and not one jaded by fear. Sure, there’s stuff to fear, but there has NEVER been a time when things were perfect for the stock market. If a person were to get out of the market everytime they heard bad news, they would NEVER be in the market.
So, what can people do to help themselves conquer their fears? Fortunately, that was the topic of a very interesting article by Dennis Berman in today’s Wall Street Journal. In the article, Berman offered up some advice from two professors: Brett Steenbarger, a psychiatry professor at the State University of New York’s Upstate Medical University and Andrew Lo, professor at Massachesetts Institiute of Technology.
Dr. Steenbarger’s advice:
1. Methodically check whether the hypothesis that got you into an investment still applies or not. - For example, if you are still planning for retirement and retirement is a long ways away, then why let the short-term market shape your long-term decisions?
2. Eliminate as much borrowing as possible. From the article:
Leverage, he says, magnifies financial results and therefore emotional swings. During times of high volatility, this can become an especially dangerous trap for bad decision making.
Dr. Lo’s advice:
1. Train yourself to recognize fear in the first place. - If you find yourself making all kinds of excuses for getting out of the market, perhaps you’re allowing fear to rule.
2. Prepare for a busted or volatile market. Again, from the article:
…it might make sense to decide ahead of time your range of responses if your portfolio loses, say, 10% to 20% of its value. Research has shown that, unsurprisingly, retail investors are usually the worst at this, adds Dr. Lo.
Finally, I have some advice:
1. QUIT watching CNBC!
2. DON’T check your 401(k) balance! Just keep socking that money away and let time heal the market’s short-term blues.
Topics: 401(k), Investing, Retirement Planning |