Keep your nerve in stormy markets
No investor enjoys a bear market, but how do you at least stay calm and rational? How do you keep your head when so many other people seem to be losing theirs?
Warren Buffett, the world’s most famous living investor, has said and written many wise things about bear markets in the past. One of our favourites comes from his letter to shareholders of his company Berkshire Hathaway in 1986:
“Be fearful when others are greedy, and greedy when others are fearful.”
Buffett knows better than anyone how stock markets can mess with our brains.
When markets soar, the reflexive nucleus accumbens fires up at the back of the brain’s frontal lobe, and we instinctively want to buy. When markets fall, the amygdala floods our bloodstream with corticosterone, fear kicks in, and we’re overwhelmed by the urge to sell.
But piling into the market once prices have already risen, or rushing for the exit once they’ve fallen, is usually a bad idea. Human beings, in other words, are hard-wired to make poor investment decisions. The rational strategy is to stick to the same strategy regardless of the market environment.
Simple but not easy
Of course, it’s simple advice, but not always easy to follow. Like now, for example. The most popular US stock index, the S&P 500, this year suffered its worst first half since 1970, falling more than 20%. The performance of the ISEQ has been similar, and indeed market volatility around the world has shown little sign of abating.
In our last post we suggested ten things to keep in mind in markets such as these. If you haven’t read it, we would urge you to do so.
If you’re still feeling worried, why not look at things from Warren Buffett’s point of view and try to use other people’s fear to your advantage?
Profit from others’ fear
Remember: stock prices reflect the very latest information and market sentiment. And, let’s face it, the news of late has been pretty bad: the continuing war in Ukraine, for example, concerns over fuel shortages, rising prices and hikes in interest rates. Right now, risks to the economy, and to equity prices, are all around. No wonder investors are fearful.
But risk works both ways. Nobody knows what the future holds. True, the bear market may still have some way to run. But, by the same token, the news could actually improve. If and when it eventually does, stock prices will start rising. Who knows? In a few years’ time, we may even look back at the summer of 2022 and see it as a buying opportunity.
Think about it: stocks are significantly cheaper now than they were at the start of the year. In other words, they’re "on sale”. You wouldn't expect a stampede for the exits when everything goes on sale in a department store. Why should stock markets be any different?
The investment author and blogger Jonathan Clements hit the nail on the head the other day when he wrote: “I take no pleasure in seeing my portfolio shrink, but I love buying stock index funds at discount prices.
Keep on buying equities
We strongly recommend, as we always do after steep market falls, that investors just keep calm and carry on. Don’t be tempted to tinker with your portfolio — and certainly don’t stop drip-feeding money into stocks on a regular basis.
In the long run, the financial markets have always rewarded disciplined investors with balanced, globally diversified portfolios who keep on buying when others are selling. There’s no reason to believe they won’t continue to do so in future.