July 2022
"The stock market is a device for transferring money from the impatient to the patient."
— Warren Buffett.
Greetings!
No one likes losing. We are averse to losing because we feel the pain of loss more acutely than we feel the pleasure of gain. In fact, for most people, losses are two times more painful than the joy of gain. Academics even have a name for this. It's called Loss Aversion. We have seen that play out in investing, especially over the last couple of months.
I've learned early on as an advisor (and an investor) that an account that went from $1M to $1.5M and then down to $1.3M was viewed as a loss of $200k instead of a gain of $300k! That's because there was an expectation for the portfolio to be at or above $1.5M. Most people hardly notice when the market goes up over time, but they sure do pay attention when it goes down. Is it irrational? Absolutely not. We have an emotional attachment to our hard-earned money, and the thought of losing some of it is more powerful.
Loss aversion makes investing so challenging. Investors' emotions are their biggest enemy during crashes, corrections, and bear markets. During every single bear market, there will be times when you wonder if the losses will ever stop. You will always wonder how much lower the market can go. The economic news will be terrible. Other investors around you will be depressed. Pessimism will become pervasive.
So what should you be doing? Sometimes it's best to do nothing. Do not panic - just because the market is down 20% doesn't mean you will lose everything. Some things you may consider doing -- review your portfolio with an adviser. Do not expect to sell the top and buy the bottom (they are evident only in hindsight.) Determine your need, ability, and willingness to take risk. Rebalance. Harvest some losses if appropriate. Having the discipline to stick with a good plan even when it doesn't feel good is an underappreciated skill set.
The point is not to predict every bear market or crash but to psychologically prepare ahead of time, knowing that historically, US equity returns following sharp downturns have, on average, been positive. Case in point, in the 15 months that followed that March 2020 bottom, the stock market doubled.
Don't hesitate to hit reply to connect. Sometimes a conversation can give you the emotional distance and clarity necessary to make the right decision. And sometimes, that's all it takes.
Dream. Plan. Prosper.