Keep Calm And Carry The 1: Investors Often Miscalculate Amid Volatility
Investors are in the midst of a sell-off. The Chinese stock market's troubles are leading to big questions about how much that country's problems will be a drag on the rest of the global economy. The Dow Jones industrial average was down Monday nearly 600 points, or 3.5 percent.
So, what are average investors to do? Nothing. Hang tight. At least that's what most financial experts say.
But that advice is easier to give than to follow. When pushed off a cliff, one's natural instinct is to grab for anything to stop the fall.
Within the past week, the Dow has fallen nearly 10 percent. Morgan Housel, a senior analyst with Motley Fool, says investors feel a similar impulse to stop the fall by selling off their stocks, despite the advice almost all analysts give: to accept — even embrace — the inevitable ups and downs of the market.
Housel, who studies and writes about the behavioral psychology of markets, says volatility prevents dangerous feedback loops in the economy.
"If we never had crashes in the stock market, if there was no big volatility, there would be no risk," he says. "And if there was no risk, then everybody would pile in at the same time and get a high return on your money. And if everyone did that at the same time, stocks would get really expensive, we'd have a bubble, and then they would crash."
"Hang on, stay the course" is a message most investment advisers repeat to their clients every time their portfolio takes a beating. And yet, Housel says, it's a lesson that never seems to stick.
"With 24/7 cable news, and Twitter, and stock updates on your iPhone, I think if anything that probably makes it a little bit worse; it increases the idea that we need to act now," the analyst says — while admitting that, as a member of the media himself, he might be part of the problem.
Investors sought comfort and moral support on Twitter on Monday, using the hashtag #BlackMonday. Many others turned to their brokerage firms, some of which reported technical problems because of high volumes of customers trying to execute trades on their sites early in the day.
But Ric Edelman, chairman and CEO of Edelman Financial Services, thinks the investing public is much calmer this time around.
"What we have to recognize is that our emotions are enemies when it comes to personal finance," he says, adding that his clients these days are better able to distinguish between losses and volatility, which means loss only if investors sell in a down cycle.
In fact, he says, many clients see this as a buying opportunity.
"Wall Street's on sale, and smart shoppers know the time to buy is when prices are low," he says.
Edelman says investors have lived through several crashes — including the 2008 financial crisis — only to see the market nearly triple in value from its lowest point.
"People now have developed a lot of experience, and they've realized that during very scary moments, you could be compelled to sell out of fear — but that always proves to be the wrong thing to do at the wrong time," he says.
Brennan Miller, vice president and branch manager of Charles Schwab's Chicago offices, says traffic and call volume are up over the past week. He says some of those calls are coming from investors who want to put more money in the stock market because they see bargains.
But plenty of the callers are scared — and some defy the advice to stay the course, because they realize they simply don't have the stomach for sudden drops.
"If you're not really going through a market decline, you might say on paper, 'Oh, yeah, no problem, that's not a problem at all,' " Miller says. "But then you actually go through a period like this, and you realize, 'Oh, my goodness, I can't — I can't sleep at night, I can't make it through. I think I want to sell out.' "
And for those people, Miller advises thinking carefully about just how much exposure to the stock market they really want.
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