A common human response to fear is to pull back. That’s normal and natural in the physical world. We must protect ourselves from real danger and real harm.
In the investing world, it’s a little bit more counter intuitive.
When prices are falling, the most common temptation is to bail. It begins to feel like putting money into the market has no purpose, as if it just evaporates. In actuality, the story is not so simple. Maybe the best way to describe it would be with a metaphor…
Imagine that one week when you go grocery shopping that you notice a sign on the way in indicating that all food is 30% off today. I believe your first emotion would probably be excitement, not fear. I also believe that you would buy as much that week, if not more, then you do in a normal week. You would be all about stocking up when the prices are low before they went back up.
If you shook your head, walked out of the store, and drove home lamenting that it was a terrible time to buy groceries, I would probably wonder about you. But that’s actually the reaction that most individuals have when the stock market goes down significantly in value. Instead of consistently buying up investments on sale, they reduce or eliminate contributions, feeling like it’s useless.
I know that many of you are no longer in the contribution phase of life, but some of you are and might need a reminder to not only stock up on toilet paper, but on undervalued securities.
If you have any questions, please feel free to contact me.