A couple of weeks back my pal and fellow Chautauqua speaker Firecracker and I were talking. At one point I was sharing with her an insight I had begun to develop about myself. Namely that I simply must be fundamentally wired differently than most folks.
One of the key human characteristics that research has nailed down is that we are more loss adverse than gain driven. Makes sense. Back in our hunter gatherer days those who survived to pass on their genes were more focused on avoiding being eaten by the tiger crouching in the tall grass than in gathering more roots or snaring an extra rabbit.
With tigers (sadly) few and roots and rabbit available in the supermarket, we now apply these evolutionary tendencies to a fear of loss in the stock market that is greater than the prospect for gain. But not me.
I, I told her, am much more bothered by missing out on the market’s rise than I am bothered by those times it drops. The market plunges and I yawn, roll over and go back to sleep. But let it rise with me having cash on the sidelines I hadn’t gotten around to investing and there is wailing and gnashing of teeth. The prospect of gain, for me, is far more enticing than the fear of loss.
No, she said after a pause to consider this case I had made, that’s not it at all.
For you there is no loss and so no fear of loss. Your understanding that the market always goes up and that its periodic plunges are so normal, expected and temporary means that, for you, there is no loss. There is only a temporary drop before the inevitable continued climb. Missing out on that climb is the real risk and that is your real fear.
It is not that I’m not afraid of tigers, it is that I know what is rustling in the grass is a sweet house cat pretending to be a tiger. The Nightmare on Wall Street is only a spooky story told to drive media ratings.
This all may seem obvious to you, but it was a revelation to me and while it shattered my conceit that I was a special little snowflake, it also revealed an even more important insight. If you are going to survive the next plunge without losing sleep or, worse, selling at the bottom in a panic, this is the mindset you want to cultivate for yourself.
I started this blog in the spring of 2011. By then the market had already been going up from its March 2009 bottom for two years. It has since gone up seven more. It has been a long time since a truly ugly bear has tested investors’ nerve.
If you are going to follow The Simple Path to Wealth described on this blog and in my book, it is critical that when the market plunges you ignore it and stay the course. If you don’t, if your nerve fails and you sell in the panic all around you…
The advice on this blog and in my book will leave you bleeding by the side of the road
There is no shame in understanding yourself well enough to know that a market plunge is more than you are willing or able to endure. Indeed I recently published a guest post from my pal Mr. Moose on his WARM strategy just for you.
But if you are on The Simple Path I’ve laid out, you have to be absolutely clear on this, especially if you have never lived thru a major crash. So right now, do yourself a favor, write this down and post it somewhere you can see it:
When the market crashes, for me, selling is simply not an option
When you buy VTSAX or a similar broad-based stock index fund your holding period should be forever. Once retired and living off the portfolio you’ll take the dividends in cash and maybe sell ~2% of your shares to reach the target withdrawl rate of 4%. That’s the only selling you need ever do and it certainly won’t be driven by what the market is doing at the time.
For this jlcollinsnh approach to work for you…
…you must stay the course when the market gets rough.
If you find yourself nodding and thinking, ‘Well of course!’, bear with me a little longer. Gather closer around the fire as darkness closes in and the coming storm builds.
Yes, you say, I already know this. The last time, back in those ancient days of 2007-9 the market lost ~50%. I can handle that, no sweat.
Would that it were that easy.
See, here’s the thing. Back in March of 2009 when the market hit bottom and those staying the course had seen their portfolios get cut in half…
Nobody knew then that the market had bottomed
Indeed, all of the smart guys I spoke to at the time were predicting the market would fall another 2/3rds. And their data and arguments were very persuasive. Especially for investors who had already watched their holdings relentlessly fall for some 18 months running.
Let’s look at this with some mathematically easy numbers.
Suppose after years of investing and saving your nest egg had reached the princely sum of $1,200,000 by 2007. By March 2009 it has been cut in half and you are now looking at only $600,000, reached by a months long grind of falling prices. And, as painful as this is, what you are now hearing all around is that you can expect this to be cut to $200,000 before the dust settles.
This, of course, turned out to be wrong. But you had no way of knowing that at the time. Trust me when I tell you emotions, especially fear, are running high.
This is why, if you are going to be on this Path, it is critical that, while things are calm and your mind is unemotionally rational, you hard wire your brain with this:
When the market crashes, for me, selling is simply not an option
You must tie yourself to the mast and avoid the siren song of panic.
To be clear, I am not predicting a bear market. My advice today is the same as that in 2013 when I wrote Investing in a Raging Bull.
As I have said many times in the posts and comments here, nobody can time the market. I have no idea what the market is going to do tomorrow, next week, next month, next year or five years out. Go out ten years and my bet is it will be higher. Go out 20+ years and assuming the United States and civilization in general have survived, the market will almost certainly have rewarded us handsomely. If we stay the course.
One of the most common questions I get runs along the lines of:
I have $xxx,xxx and want to invest. But the market is at an all time high. Wouldn’t I be better off waiting until it corrects 20%?
Here’s the short answer:
If you are asking this question you are not ready to invest. You don’t understand how the game works and what to expect from the ride. Until you do, stay away from the market.
Here is the longer answer:
- The market is routinely setting new highs. Look at the chart in this post. The market always goes up over time and it is always setting new highs as it does. In fact, the market goes up ~3 out of every 4 years. In fact, the market has set new highs almost every month since March 2009.
- Of course you would be better off if the market dropped 20% and then you invested and then it started back up again just for little old you. But as richly deserving as you most certainly are, the market is very unlikely to do that for little old you. It might just keep going up, leaving you in the dust. It might drop 19% and then go back up before hitting your 20% target, leaving you in the dust. It might drop 20%, see you invest and continue to fall.
- Oh, and don’t expect Dollar Cost Averaging a lump sum to save you. Here’s why.
But here is the biggest problem with that question:
Along with the lack of understanding it reveals, it reveals the fear that lack of understanding leads to. And fear leads to panic when the market gets rough.
If you are afraid to invest your money today because the market might drop tomorrow, how will you feel once it is invested? There really is no difference.
*Both Chautauqua weeks have sold out. However, please feel free to put yourself on the:
What is a Chautauqua, you ask?
My take — Chautauqua 2018: Mount Olympus
What the speakers have to say:
Millennial Revolution — Chautauqua: Come Join the Family (This is a brilliant post with all the details!)
1500 Days to Freedom — Meet some awesome people… (Another brilliant post, this one with dinosaurs!)
ChooseFI — Oh, the Places we will go Chautauqua in the words of the speakers who will be in Greece. There is nothing quite like hearing the voices behind the words.
Also, be sure to listen to this episode with Travis Shakespeare. Travis is a master story teller and, among other things, he shares three:
- How the FI movement fits into the cultural fabric of America and its traditions of rugged individuals charting their own course.
- The coming documentary on the FI movement of which he is the director. (Travis is a professional filmmaker)
- How he decided to come to Chautauqua and what it has meant to him. One of the best insights I’ve heard or read yet.
Mad Fientist — Money Talks panel discussion at Chautauqua UK Attendees discussing FI and also a great inside look at the Chautauqua experience.
JL Collins — Greece 2018 Mount Olympus
My pal Firecracker also recently linked to my five part series describing my condo disaster way back when. It seemed to strike a cord with a lot of people so, in case you missed it, here is Part 1 of…
How I Lost Money in Real Estate Before it was Fashionable