By Roger Nusbaum
You don’t need to be involved with the stock market on a daily basis to know what a huge business investing is on multiple levels. The dollars flowing to brokerage firms, mutual fund companies, hedge funds, registered investment advisors, stock market television networks and many more types of participants are huge.
For most individuals the extent of their involvement with markets is through their 401k plan and for fire and police personnel, most of their involvement will be through their pension plan as we looked at a couple of weeks ago.
Anyone fortunate enough to able to save some money from their paychecks on a regular basis may want to consider allocating some of that savings to the stock and bond markets. In future articles we will look at different ways to invest and what portion of savings to invest but the focus today is to create a building block of understanding of how the stock market tends to work and some human factors that will be a large determinant of success in the markets.
The most important thing to remember about the stock market is that most of the time it goes up but every so often it goes down a lot. When it is done going down a lot it goes back up.
That probably seems like a silly comment because people generally know the stock market goes up and down but it gets to the heart of understanding human behaviors that influences investment results. At a time like now when the market has been going up for a while people will say “of course the market will go down at some point, that always happens and then it comes back.” We know it works this way because the market went on to make new highs after the Great Depression, the Internet bubble and the financial crisis from 2008.
Despite the fact that at a time of reasoned thought people understand that the market goes up and down, while it is actually happening people lose their sense of reason, forget that the ups and downs are a normal market behavior and they panic sell when the market is low. It is not much different from the emotion or excitement that often sets in when a firefighter responds to his first fire. Of course everyone is well trained and knows what their responsibilities will be but those of us who have been on a few fires know to keep an eye on the newer firefighters to try to prevent their excitement from getting the better of them.
So it is with investing when people panic sell because in the heat of the decline their emotions (their fear) gets the better of them and they forget what they knew and come to believe that this time is different and sell at the bottom which is the worst thing an investor can do.
From the high in 2007 to the low in 2009 the stock market as measured by the S&P 500 went down 56% which is a scary thing but as I wrote on my blog back at the time, there is no question that the stock market would come back and make a new high. The variable was when it would happen. It turns out that it took four years for it to happen.
People able to remain calm under the pressure of 2008/2009 haven’t sustained any permanent damage (talking stocks, housing might be a different matter) but people who succumbed to their fear and panic sold probably did permanently damage their financial plans.
The above is a jargon-free discussion of some very sophisticated investment concepts and anyone able to control their emotions has a much better chance for investment success than those who can’t.
Any questions? Feel free to email me a fire-chief at walkerfire dot org.
This week’s picture comes from the Snow Mass Wildcat Fire District in Colorado. The trucks are painted as part of the Portraits of Hope which provides art therapy for people with disabilities.