Section II - Lesson 6
Investing Basics - Managing Emotional Issues
Having read the preceding lessons about risk, you may feel quite confident that you know and understand the risks of owning common stock and that you’ll be prepared to ride out the ups and downs of the market over the coming 50 years or so.
After all, you'll think, you’re a long-term investor, you’re diversified, you dollar cost average, and you’re an intelligent human being.
Well, I’m here to tell you that no matter how much you know about risk and the market, there will come a time when you’ll be shaken to the bone. Stocks will be plunging, the economy will be tanking, and our helpful media will be predicting the end of the world.
Your faith and intelligence will be severely tested in times like these. You’ll actually begin to wonder if this might turn out to be the first and only time in history, that the stock market never comes back.
Could inflation be dead? Could the age of progress and technological innovation be over? This doesn’t make sense, of course, but these thoughts will occur to you.
The problem is that we’re all human beings, and fear is our most powerful and troublesome emotion. And when the world seems to be falling down around our ears, it’s not always easy to access our intelligence and keep a firm grip on our common sense. Fear is irrational. Don’t let it tempt you to abandon your well-conceived master plan!
If you can put aside your fear long enough to think things through, a number of things will occur to you.
The market always recovers and it will recover again this time as well.
You’re not really losing anything because you’re not selling anything.
Your dollar cost averaging program is buying lots of stock at give-away prices that will add considerably to your wealth when prices ultimately rebound, and they will.
It’s simply a matter of having the discipline to stick to your master plan during good times and bad. Your strongest asset is the fact that you have a master plan, and that you can focus on the big picture, and see the forest in spite of the trees. When you have this kind of discipline, bad markets are just another opportunity to buy cheap stock!
Do not allow yourself to panic in these types of situation. Do not be tempted to chuck your stock index funds for fixed income type investments.
Safety is not your best course of action under these circumstances. Settling for low returns is too expensive a price to pay for lack of fluctuation. You have to play the investment game “to win.” You’ll not do well if you play it “not to lose.”
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