How bad have stocks been lately? Regardless of what the numbers say, what matters to people is how they feel about stocks. Two people can feel very differently about the same events. Here we have a couple disagreeing about stocks:
Sue: “After all this excitement in the stock market, the last two weeks have been good.”
Andy: “Are you nuts? Stocks have been brutal lately. Worrying about our savings is keeping me awake at night.”
Sue: “But I’m talking about just the last two weeks. Look at this chart.”
Andy: “That proves my point. The TSX went down below 8000. At this rate, we’ll never be able to retire.”
Sue: “But we’re up 2.4% in these two weeks. That’s good for such a short period of time.”
Andy’s reaction is more typical than Sue’s. The pink region in the chart measures Andy’s psychological pain of watching stock prices sit well below where he hoped they would be. It’s like watching your favourite sports team when they’re way down. Even if they close the gap somewhat, fans suffer psychologically while their team trails badly.
Andy isn’t wrong. After all, he knows his own feelings. But, the way he perceives the stock market may cause him to make choices that hurt his long-term returns, such as selling at a low point. The truth is that the past two weeks have been good for investors’ returns (as long as they didn’t sell), even if it made many of them ill.
Sue’s temperament is better suited to investing success. She ignores the pattern of prices during a period where she didn’t trade stocks. In a month, she won’t care what prices are like today.
Although individual stocks can fall to zero permanently, you’ll have much bigger things to worry about than money if the entire stock market goes to zero. Sue remained calm and trusted that stock prices would rebound eventually. Stocks may drop again in the short term, but it won’t be permanent.