The Hidden Dangers of Fear in Investing: Lessons from Market Fluctuations

In today's financial landscape, market volatility is a constant companion. But how we react to it can make all the difference in achieving our financial goals.

Almost everywhere you look, headlines talk about market volatility. While it's true that markets generally rise more often than they fall, any fall can be all that is needed to trip us up from achieving our financial goals. It’s not about the actual fall though; it’s about the emotions we attach to it when it happens. No emotion can influence or dictate our actions more than fear. Fear is a stronger emotion than joy, so when the market is going up it doesn’t trigger an equivalent emotional reaction. When the market goes down our fear emotion goes into overdrive, telling us we need to make a change. This emotion, fear, doesn’t subside until our investments regain positive territory.

Part of the reason our fear reaction is so strong is that we forget how often market fluctuations occur. The typical reporting for how the market performed in a given year is based off the percentage change year-over-year. In most years, there is an increase in value. In fact, the year ends in positive territory more than 70% of the time. This can give the impression that the markets go up more often than they go down, implying that the market was positive all year. The truth is more complicated though.

The following chart shows the annual returns of the S&P 500 with a blue bar and the maximum intra-year market decline with a red dot. Since 1980, the average annual correction has been -14%. During that same period, the market averaged a total return that was +12%. The point being that market volatility is very normal and is not predictive of how the year will end. With the market usually ending in positive territory, the turmoil that happens during the year can be long forgotten.

In 1986, the market ended being up +19%, but over the course of 1987 it declined by -34%. All was not lost though; the market rebounded and ended the year with a +5% return. This is just an example of what happens during a year. When we look at how 1987 performed, we see just a +5% return, thinking it was just a slow year but still positive. We report figures based on our calendar, but the markets are oblivious to the calendar. What is reported at the end of the year does not tell the entire story.

Many of the best trading days each year come shortly after a decline. Why does this matter? Statistics suggest that if you miss just the 10 best trading days of the year your market returns are cut by over 50%. Meaning, if we allow fear to drive our investments and we pull out of the market due to a market decline, we are likely to miss the eventual rebound and some of those better trading days. The chart I shared has already shown that despite market declines, we still typically end in positive territory.

Fear is a powerful motivator though; salespeople will use it against you to try and get you to buy something. With investing, your own fear is working against your best interests. In this case, trying to convince you that you need to sell things. There are two emotions that drive your decisions, joy and fear. Joy is the feeling you get when you buy an investment, and it goes up. This initial joy becomes quickly sedated after the investment has already increased in value. Whereas fear is an emotion that can linger. Fear does not dissipate after an investment has dropped; it thrives for as long as your investment is lower than the recent high mark.

Is this just another article about market volatility? No, this is an article about not letting fear derail your financial goals. While it is never enjoyable experiencing market turbulence, we need to remember the Persian adage, “This too shall pass.” History has repeatedly shown us that perseverance rewards us, and fear punishes us. We must remain intentional about our investments and not allow the fear emotion to override our planning. While fear might be a fleeting emotion, the negative impacts it can have on us attaining our financial goals can be devastating.

Don't let fear dictate your financial future. Stay informed, stay focused, and reach out to a financial advisor to ensure your investment strategy aligns with your long-term goals. If this seems overwhelming or you are concerned that fear might be influencing your investments, feel free to contact me. Don’t let fear be your advisor, he can’t be trusted.

Disclaimer: All data unless otherwise noted is from Bloomberg. Past performance does not guarantee future results. Any stock market transaction can result in either profit or loss. Additionally, the commentary should also be viewed in the context of the broad market and general economic conditions prevailing during the periods covered by the provided information. Market and economic conditions could change in the future, producing materially different returns. Investment strategies may be subject to various types of risk of loss including, but not limited to, market risk, credit risk, interest rate risk, inflation risk, currency risk and political risk.

This commentary has been prepared solely for informational purposes, and is not an offer to buy or sell, or a solicitation of an offer to buy or sell, any security or instrument or to participate in any particular trading strategy or an offer of investment advisory services. Investment advisory and management services are offered only pursuant to a written Investment Advisory Agreement, which investors are urged to read and consider carefully in determining whether such agreement is suitable for their individual needs and circumstances.

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