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Fire in a crowded theater

Yesterday’s market declines—the Dow down 3.15%, the S&P 500 down 3.29% and tech stocks, as represented by the Nasdaq index, off 4.08%–were entirely within the normal range of mini corrections, which we’ve experienced numerous times since March 9, 2009.  But they represent an interesting test of character for the press and market pundits.

The most responsible voices in the press and elsewhere point out that market corrections are normal, and fear of market corrections works to the investor’s advantage.  Fear of incidental declines is exactly why investors demand a higher return from stocks than, say, for cash.

The responsible voices will point out that being able to control your fear is one of the best ways to generate higher returns in your portfolio.  They will say—correctly—that there has yet emerged no way to know the future, and therefore we have no idea if this lurch in the market is temporary or the first sign of a significant downturn.  Not knowing means that any action you take is likely to be wrong—especially since the markets have always recovered to set new highs after every downturn so far.

But these declines always bring out the opportunists who do everything they can to feed the fear.  In order to get clicks, or draw attention to themselves, they will predict disaster, and claim to know what’s going to happen tomorrow or in the next week or two.  They’ll make it sound as if this one-day reversal is a clear hint of doomsday—and of course the normal fear mechanisms in the human mind is programmed to pay attention to warnings like this.

Your best course, which your rational mind already knows, is to simply tune out the pundits who yell “fire” in a crowded theater.  You know that they don’t know the future any more than you do.  Stocks just went on sale, albeit a little bit, and if you’re in accumulation mode, you might hope they drop a little more, so you’ll be able to buy cheaply and hold on for the recovery.

Your rational mind knows that panic seldom leads to a good outcome; please, if you can, give it your attention amid the screaming and shouting that is sure to show up in the news this week.

Please Note: This article is used with permission from a newsletter to which KFG subscribes. It is for our clients only and may not be republished.

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