Controlling Your Fear of the Market

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.

8 thoughts on “Controlling Your Fear of the Market”

  1. I fully agree with Dr. Steenbarger’s #1 and Dr. Lo’s #2. Investors should decide up front what their risk tolerance is, sit back, and watch the market swing up and down. They can do this from the comfort of their easy chair with a martini in their hand.

  2. This is an excellent post on an important topic. It bugs the heck out of me when my friends and clients keep calling me all afraid of the news.

    My favorite suggestions were also Dr Steenbarger’s #1 and YOUR #1. There seems something almost pornographic about CNBC — it seems like they play to one’s basest desires.

  3. I think retail investors really get in trouble when they chart the growth or loss of their stocks too often. When someone checks their accounts constantly, when they see the loss they are far more likely to panic than someone who checks every once in a while.

  4. Your suggestion #1 is super important – newspapers and TV loves markets like this because people get sucked it to watching because they beleive they are going to hear what to do (IMHO). This just creates more uneasiness and uncertainly. Stick to your original plan and ride it out.

  5. Fear is automatically gone if you can take the worst that will happen. It’s that way for everyone. That why we’re not afraid of walking on the sidewalk at ground level, but most people would be petrified of walking on a open walkway 10 stories up.

    For investing, take only up to the amount of risk you can handle, worst case. While doing that, optimize to capture as much upside as possible. Most of the common savers limit their risk as much as possible, but limit their upside too.

    That specific advice about leverage is no good … leverage is a perfect way to hit your risk sweet spot. Most of us are heavily leveraged anyway if we have car loans or mortgages, so why not leverage ourselves for profit instead?

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