Rational Investors Overcome Fear in Turbulent Stock Market

The stock market (Dow Jones Industrial Average) produced positive returns for six straight years (2009 - 2014). 2015 was only slightly negative at -2.2% or it would have been seven years.
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History has shown us the good times do not last forever. Eventually, there will be uncertainties that impact the U.S. economy. Wall Street does not like the unpredictable nature of financial uncertainty.

The uncertainties have occurred. One is China's economic instability. The other is the rapid decline in oil prices. Both have major impacts on the profitability of U.S. companies.

Stock Market Decline

The Dow peaked at 18,312 in May 2015. It closed at 15,988 on January 15th, 2016 for a loss of 12%. More than half of the Dow's loss occurred since January 1, 2016.

The Rational Investor

The Dow Jones is down more than 2,000 points since its peak in May 2015. This significant decline produces major buying opportunities assuming you have the liquidity to take advantage of them.

Is it better to buy when prices are high or low? Is it better to sell when prices are high or low? The rational investor will buy when prices are lower and sell when prices are higher. But, it takes a lot of discipline to make this happen.

Market Timers

There is no evidence that long-term market timing works. Anyone can get lucky in the short-term. Why not? No one has a crystal ball that accurately predicts the tops and bottoms of market fluctuations.

Think of it this way. No one rings a bell at the bottom of the market. If you do not know when the bottom of the market will occur it is more important to buy when prices are lower than it is to wait for the bell that never rings.

The Fear Mongers

No one, and that includes the geniuses on Wall Street, can accurately predict the future performance of the stock market. There are too many variables and too much subjectivity.

So, take the predictions of the self-ordained financial gurus with a grain of salt when they claim they predicted this market decline. They prey on people's fears. What they did not tell you is they have been predicting this decline for the past five years.

The dooms-day people are rarely right over long time periods for one simple reason. The stock market goes up more than it goes down or no rational person would buy stocks.

Your Financial Adviser

High quality financial advisers should help you make rational decisions when markets are turbulent.

They can afford to be more rational and disciplined because it is not their money.

On the other hand, they have to meet your expectations or you may terminate their services and replace them with another adviser.

One expectation may be superior performance when the stock market is going up. Another expectation may be capital preservation when the stock market is going down.

What are reasonable expectations? Ask your adviser to explain:

  • His recent performance net of all expenses
  • His performance compared to market indices
  • His strategy for buying when prices are lower
  • How he will preserve the value of your assets
  • His investment strategy for the next bull market

A series of eBooks that help you navigate the tricky waters of investing for retirement and dealing with Wall Street advisers have been developed. Click here to learn more.

Previously posted on Paladin Registry.

About the Author: Jack Waymire has worked in the financial services industry for 28 years. For 21 years he was the president and chief investment officer of a registered investment advisory firm with more than 50,000 clients. He left the industry in 2003 when his book (Who's Watching Your Money?) was published by John Wiley. That same year he launched an investor information website (www.PaladinRegistry.com) that was based on the principles in his book. Jack is a columnist for Worth magazine, a frequent blogger on major financial sites, and widely quoted in the media including the Wall Street Journal, Forbes, BusinessWeek, Bloomberg, and Kiplinger. Follow Jack on Twitter @PaladinRegistry