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Should you mind when markets fall?

2022.09.18
Investing is a pleasure when the value of your investment increases and you can just sit back and watch your investment grow. In the long run, it is so, but the cost is constant short-term market swings and dips that shouldn’t bother you at all if you have long-term investment goals like saving for retirement. Of course, when the value of your investments falls, there are unpleasant emotions. And this is natural – every investor, even the most experienced, goes through this at one time or another. However, there is no place for negative emotions here. This is exactly where the positive emotions should come of having a long-term periodic investment strategy – such as saving for your retirement.

 

1
Why do markets fluctuate?

There are many factors that cause market fluctuations (economic, political, all kinds of unrest - such as the Covid pandemic that has affected the world for 2 years or the current war in Ukraine), but perhaps the most important of them are human emotions. Frederick K. Martin, a well-known US investor, has said: "The main factors influencing short-term fluctuations are human nature and physiology." He says that when your investments are growing, a substance called dopamine affects the brain and creates a feeling of euphoria, but when your investments are falling, the brain sends a signal that you are in danger. Therefore, many investors balance feelings of euphoria and fear on a daily basis. Such swings in emotions can speed up the decision to buy or sell an investment, which is what causes market swings.

2
Decreasing investments causes stronger emotions than increasing

Nobel laureate Daniel Kahneman states in his psychological research findings that falling prices cause stronger emotions than rising prices. Some people fear loss twice as much as they fear success. Fear becomes a powerful enemy of the investor. One should try not to pay attention to the fluctuations of the market, just let them happen. If the fluctuations are disturbing, you can complain, scream, but nothing else should be done. Yes, it is a painful decision, but at the same time it is the right decision. The market will recover and start to grow as usual. It's only a matter of time. And you have time until retirement, so why waste your emotions on it?

3
Have you ever been on a ship in rough seas?

Experienced sailors use a trick to avoid indigestion - they direct their eyes to the distant horizon. They do not focus on what is happening under their feet. So it is with market fluctuations. Focus on your long-term goals and don't react to short-term market fluctuations. Short-term market volatility is the price you pay for long-term returns. Most market declines will eventually look like a blip on the screen - if you notice it at all. Long-term savings for your future is successful if you don't react to short-term disruptions.

4
Market history is in your favor

Jim O'Shaughnessy, a prominent US investor, has said, "Market history is in your favor." He means that markets have successfully recovered from countless downturns. And although it may be counter-intuitive, when the market is down, you can make additional investments at attractive prices in cheaper investments. And taking into account the fact that no one knows in advance when such an opportunity will arise - this should be done constantly, regularly. Which is what you do when you regularly invest in your retirement funds.

Regular periodic investing isn't about losing money when markets fall, it's about buying a larger amount of securities at a lower price, which means higher returns during rising stock prices. Also, automatic and regular investment of a fixed amount helps to avoid the influence of emotions when making investment decisions.

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