Have you ever noticed that most of the people who forecast what the stock market is going to do predict that it will either
It’s easy to be fearful when markets go down and you see the value of your portfolio decline. If the decline is sharp, investors get frightened. If the headlines scream of financial doom, people can panic. To help you cope when fear hits, here’s a list of “worry traps” that you should recognize. Worry traps are phrases that you will recognize because you have heard most of them before. They are part of the playbook that doomsayers bring out to frighten you. Here are four examples:
- The “sucker’s rally” trap. This never fails. Whenever the market turns down and there’s a move to the upside, any number of people will tell you that it’s a sucker rally. What they’re basically telling you is that if you buy stocks that have been reduced in
priceyou’re a “sucker.” If you listen to them, buying stocks after a dip is foolish. Of course, the way to make money is to buy low and sell high and the only way to do that is to buy stocks when they’re “on sale.”
- The “Bear Market Rally” trap. This is a variant on the “sucker rally” comment. The problem is that people can’t even agree on the definition of a Bear Market and nobody rings a bell when one ends. The people who use this term will never admit that a Bear Market is over so any recovery after a dip will be called a Bear Market Rally. Listening to this advice is sure to keep you from buying stocks when they’re cheap.
- The “wise market” trap. Have you ever noticed that financial “experts” are always talking about what “the market is telling us?” The market isn’t an organism and it isn’t telling us anything. It’s a counting mechanism that allows people to participate in the financial affairs of a free market economy. In many
casesit’s reacting to the news of the day, which is replaced by the news of tomorrow when the new day dawns. It often reacts to internal market dynamics which have nothing to do with the real world. This is especially true with computer-driven trading. From one day to the next the market is neither rational nor wise which means that investors must take the long view and look at economics as their guide.
- The “laundry list” trap. This is a list of all the reasons why the market will go down. It’s a laundry list of problems: economic, financial, political, or military that make it hazardous to invest. These currently include slowing global economic growth, Fed policy, political uncertainty, trade issues, Brexit, commodity prices, and regional military conflicts. The problem is that there is always such a list. As problems are addressed, new worries pop up that replace the old. There’s another old Wall Street saying: “Bull markets climb a wall of worry.” Know problems are almost always discounted by the market. It’s the unknown surprises that represent danger.
Most people are psychologically drawn to these common traps. It’s scientifically shown that people withdraw money from their investments at market bottoms and buy at market tops – selling low and buying high. That’s where an experienced financial advisor is worth their weight in gold. They know these traps and how to avoid them.