Stoicism in market declines

Nassim Taleb wrote a great book called “The Black Swan” about unpredictable events (black swans) including stock market crashes. It’s an easy read and I would recommend it for anyone who invests.

Without spoiling the book, one takeaway is how watching the daily volatility of the market can trigger emotional responses that lead to stress and bad investing decisions. He describes a few different people and their style of monitoring their investments. One type of person is the dentist who just has their money in a mutual fund, regularly makes contributions to it, and only looks at the statement at the end of the year.

The dentist doesn’t stress about the market every time it dips. He doesn’t sell when the market goes down, and reinvest at the wrong time and miss the recovery. In the long run, the dentist’s passive investing avoids many stressed induced bad choices.

2016

At the beginning of 2016, the market took a big downturn that was steep and volatile enough (10%) that a lot of people sold because they were afraid this might be the next big crash.

screenshot-2017-01-14-at-11-00-22-am

If you told people in January 2016 that you thought the S&P 500 would end 2016 with a 12% return, they would have called you crazy.

But that’s exactly what happened. As with every big dip in the history of the US stock market, it was a great buying opportunity. I personally increased our 401(k) contributions during that time.

The dentists who just put their money in their fund and don’t pay attention to the market may have not even known about that 10% drop and they only saw at the end of the year that they were up 12%.

Personally, I am not a dentist. I do follow the market. But I have conditioned myself over the years to be excited during declines as they are buying opportunities.

Black Monday

When a crash gets really bad, I remind myself of Black Monday. The market crashed 22% in one day. I go to Google Finance and zoom in around October 19, 1987. I look at how scary that must have been. Then I zoom out to the full date range available on Google and try to spot the crash, and look at how little that crash really mattered in the long run -other than for the families of those who killed themselves on that day or were wiped out from being too highly leveraged.

Black Monday is the downtick in ’87:

screenshot-2017-01-14-at-11-20-24-am

Conclusion

If you focus on my blog for budgeting and just making sure that you are saving enough, I encourage you to not feel like you need to be some advanced trader. You really don’t need to follow the markets day in and day out. Don’t feel bad if you skip all my articles about different types of trades. If all you do is stick to a strict budget and reliably save and invest money, you’ll do great.

One last take away. Here’s a chart of someone putting $1,000 per year in the market starting in 1972. Of course, I recommend doing that at least monthly instead of once per year. It would be a shame if someone got discouraged in 1987, 2001, 2008, 2010, or 2016 and stopped investing.

screenshot-2017-01-14-at-11-29-29-am

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