For many investors, of all ages and backgrounds, market declines can be a lot like junior high.
- Both can be emotional.
- Both are filled with hormones.
- Both are times when the individual thinks something bad is happening to him or her, that has never happened before.
- Interestingly and conversely, there is a lot of emotional pressure to follow the herd. If little Sally or Johnny did it, it must mean everyone should do it.
- Both can be times when the individual thinks the bad times will last forever.
- Both are often absent of long-term perspective.
- Junior high is eventually over and at least historically, so have been market declines.
- Both can inspire emotional decisions.
During a market decline, I would suggest investors considering the following:
- Market declines are normal. Since the 1920's there have been numerous market declines eventually followed by recoveries. Again, this does not guarantee the future but is important information to know.
- A decline on paper is a paper decrease from a previous time period. Simply stated, this means if the investor sold at this particular time, the market value is less than a previous time.
- The only time an investor actually makes or losses money on an investment is when the investment is sold. At any other time, the current market value is only a representation of what the investment gain or loss would be if sold at the time of stated market value.
In addition, I would suggest investors ask the following questions:
- I would suggest the first question is not what the current market value is today. Rather, I would suggest the first question is what the potential for the investment to reach the desired return objective within the original time frame of the investment when it was bought?
- What is potential for the investment to recover to its previous high and is there an estimated time period? This question is related but different from the first, specifically during the decline.
- Is there another investment, because of the decline, which has a theoretical or potential greater upside going forward?
- Finally, is selling during a decline an emotional uninformed decision, or is there a fundamental informed reason for so doing?
Junior high is eventually over. Historically at least, market declines have also been eventually over. What is often remembered from both are bad decisions made during the time period.