Over the last couple of weeks, stock markets around the world have seen swooping downward trends thanks to jittery and uncertain emerging market activity. If we could look at this objectively, we would barely bat an eye. After all, the stock market spent most of 2013 on a steady and dramatic upward climb and we all know that can’t last forever.
But of course, people aren’t objective. People are very much subjective – and emotional, too. When the market starts dropping, people start getting uncomfortable. Media outlets don’t help the situation; starting off your day listening to the morning news or NPR Marketplace report talk about how stock market futures are down day after day after day isn’t exactly conducive to positive thinking and confidence about the state of your wealth.
So investors get nervous. They become anxious, worried, and scared. If the market trends downward long enough, they’ll also flat-out panic and many will pull their investments. This despite the fact that we know better. All one needs to do is look at the historical data available to see the stock market always rises and, when it comes to that market, what goes down always comes back up.
It’s for this reason that selling your holdings when the market isn’t performing well is a terrible mistake and the worst thing you can do with your investments. What you’re effectively doing is selling low (and if you continue this kind of behavior, you’re likely to buy high, as well, when you get excited about the market’s inevitable rise).
Those of us who are passionate about personal finance and handling our own investments know this. But is having the knowledge and having the ability to stay the course the same thing? I pose this question to my fellow Millennials in particular, who may not have invested before the Great Recession. We may know all about “being greedy when others are fearful,” but all we’ve ever seen is a recovery and an upwardly-trending market that hasn’t taken any serious punches or lost an incredible amount of value.. but the issue of another crash in the future is about when, not if, and recent stock market activity has me wondering: twenty- and thirty-somethings who have only begun investing in the last few years, could you really handle a bear market?
Many members of Generation Y haven’t gone through something like the crash of 2008, or the Dot Com bubble of the early 2000s. It’s easy for us to assert we’d never foolishly pull our money out at the bottom of the market and consequently miss out on the meteoric rise that followed. But is this truly the case? How can we know we won’t give into panic and the strange phenomenon known as herd mentality that seems to seize even the most logical, intelligent investors every time the market collapses?
Just as students of history learn that you cannot point and laugh at the apparent foolishness of people in past centuries as we have the gifts of hindsight and understanding of their futures, I don’t think young investors today can rightfully scoff at the people who panicked in the two major stock market crashes of the 2000s. We have a better vantage point from which to survey the landscape; of course we can say now that the best course of action was to take no action at all or to even buy stocks when the market bottomed out.
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We won’t have this vantage point the next time around. Next time, it will be us in the trenches with no ability to see beyond where we currently stand. In future market troubles, it will be us who must stay the course and ride out a bear market as we watch our portfolios drop in value, possibly for weeks, months, or even years. Will you stick to the investing principles of buying low and selling high when it is your own net worth that has been slashed? Do you think you’ll be able to grimly continue your monthly contributions through a bear market? Can you avoid falling in with the herd and keep yourself from being driven by fear?