May 20, 2024
Last month saw rockiness in the stock market. Examining the psychological aspects of a drawdown, investors must ask themselves how much pain they can tolerate.
As of this writing, stocks are up this year so far. Let’s say you decide to get in the market today, but bad luck strikes and keeps striking, making your original $50,000 worth $25,000.
How would you feel?
You might feel a bit foolish or think you’re bad at investing. You might feel like a sucker. You’d probably conclude the stock market is a casino that’s not worth entering.
This is more common than you might think. When the market is hot and news trickles down to the masses, they’re the last to know.
The last real time to invest heavily was March 2020. But it was scary then – right when the world found out about COVID-19. In general, the market rewards those who invest when it’s dangerous. When it’s safe, don’t expect huge returns.
“It’ll come back,” people usually say. They think they can afford the pain. But then things get worse. Still, people remain patient. Then markets drop more, and they’re left rationalizing losing portfolios and wishing they’d sold months earlier.
Yes, history says markets come back, but not always on beneficial timeframes. The market came back after the Great Depression, but it took 16 years.
Those with long time horizons (i.e., the young) are fine. But if you’re close to retirement, too much exposure to stocks can be a huge risk.
I’ve seen some charts lately that suggest people in their 60s and 70s have the highest exposure to stocks in history. For them, taking the certain, juicy yields available in money market accounts is probably wiser.
Most people plan to buy and hold, riding out the drawdowns. But if you need the money during a huge bear market, you’ll be forced to sell assets at a big loss.
Then your plan is out the window. As Mike Tyson said, “Everyone has a plan until they get punched in the face.”