• ETF Enthusiast

Odds are, when markets move, you should reverse the emotions that you feel

When a market experiences a correction or a collapse, news and events create a chain reaction of investors selling their investments to limit future loses. This doesn’t mean that their money is lost forever, and the remainder of their lifetime will be spent trying to recoup their loses, but the evidence shows that selling in a time of crisis generally hurts your chances of an easy recovery.


Timing the market is generally a terrible idea. The market often rebounds when no one expects it and does so in volatile swings that cause you to question whether it is the start of a rally or just some more volatility on the way down. The reality is that your re-entry point into the market never feels safe. Before you know it, you have missed out on some of the most important days for increasing the value of your investment. The basic premise of long-term investing means holding on tide for the full ride and waiting out market storms for sunnier days in the future.


What sets people apart is how your brain responds to meaningful market events. If you are emotionally tied to the short-term outcomes, then you are more likely to make decisions that cause damage to your investments. Managing your own investments comes with its challenges for this very reason.


"The investor's chief problem-- even his worst enemy-- is likely to be himself.” -Benjamin Graham


It is crucial to avoid this kind of behaviour which will damage your investments. For this there is a mental shift that I propose you practice. Odds are that when markets move you should reverse the emotions that you feel.


Take the following two scenarios for example. I will present the traditional thought pattern that goes through an investors mind as well as the reverse thought pattern which I propose you make:


Scenario 1: Markets come down after global events cause fear, this sparks wide-scale market sell offs, world markets are heading to correction territory.


Traditional thought pattern: This could go on for a long time and significantly hurt all the returns I have made over the past few years. If I get out now, I can limit my loses and get into something safe like cash while I wait this out. I can invest again when the dust settles.


Reverse thought pattern: My portfolio has taken a knock, but this is a great opportunity to invest at lower prices than I have for years. The more I can add to my investments while the market is getting cheaper the greater the benefit on my investments for the long-term.


Scenario 2: The bull market continues; the market is up over 30% this year after similar gains in the prior year.


Traditional thought pattern: Everyone else is making money, let me put all the excess cash I have into the market to make sure I am maximizing my return.


Reverse thought pattern: These times are the reward of what we wait so patiently for, I am proud of the gains that my portfolio is making, but I should keep to my monthly investment strategy, and start building up a cash buffer for the next big buying opportunity if the market loses its steam.


Accepting that the market will go down is important, it will statistically do this once every four years. This fact should make us appreciate times of market bliss. So avoid the fear of loss or the feeling that you are on a sinking ship when markets are tumbling, these are rather to be thought as rare buying opportunities because markets will go up more than they go down.

ETF Enthusiast

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