In a bear market, it can be easy to panic and forget that investor behavior drives results more than choosing the right investments. People tend to be their own worst enemy during these trying times. That’s why it is important to learn from those that have gone before you.
Check out this episode to discover the 4 typical investors that we encounter during market declines. As you listen consider who you have been like in the past. Which one are you feeling like now? Which one do you want to be in the future?
4 typical investors during a market decline
If you have felt worry or discomfort when watching the financial news lately you are not alone. Bear markets can shake the confidence of the toughest, most steadfast investors.
Hearing the stories of others, having an awareness of where you are, and taking an inventory of what your specific plan calls for can help you create a successful blueprint for weathering a bear market.
During a market decline, all Nervous Ned can think is how on Earth am I going to make this up?
Richard Thaler’s findings, that the pain of a loss is felt two times more than the joy of a gain, rules Ned’s decision-making. He has to fight not wanting to panic sell his investments to avoid losing more.
This is why it is important to analyze the risks. The risk of running out of money is much worse than the volatility risk presented in the market. If you feel nervous like Ned, zoom out a bit and think about what your financial plan says. How much do you need to see you safely through a financial decline?
Try being a short-term pessimist and a long-term optimist. Keep your long-term money invested for growth and have your short-term money at hand. By focusing on what you can control you may not have to be as nervous as Ned is.
Told-you-so Tabatha allows regret to turn into revisionist history. They look back at financial events with 20/20 hindsight and regret not making the ‘obvious’ choice to sell when they ‘knew’ tides were changing.
Don’t always allow your past self to drive your future investment decisions. Told-you-so Tabatha struggles to see when things will bottom. They always want to wait until things look better. It sounds good in theory, but in reality, many of the biggest gaining days, occur next to the biggest down days. So by waiting until things are better, you could miss some of the best performing days.
The biggest obstacle to a good plan is a perfect plan. Don’t miss out on a good opportunity by trying to make everything perfect.
Defiant Dan is overconfident and has a hard time questioning their decisions. They may have jumped into stocks that were exciting at the time and tend to hold onto their speculative choices a bit too long.
If you have a bit of FOMO or feel the need to defend your investment choices you may have a bit of Defiant Dan in you. Try to stay away from exciting investments and stick to your investment plan. Consider how diversified your investments are and have the discipline to move away from things when they are doing well.
Steady Sandy chooses to not look at their portfolio in a market downturn. They remind themselves that past declines were temporary. This helps Steady Sandy to be more open to adjustments and listening to investment advice.
But there’s an extra step, we often see missed from these types of investors. While not paying attention, can prevent you from making behavioral panic sells, it could also cause you to miss out on opportunities. Listen in to discover the opportunities that Steady Sandy may be missing by closing their eyes to the financial news.
Outline of This Episode
- [2:56] Nervous Ned
- [7:02] Told-you-so Tabatha
- [10:44] Defiant Dan
- [13:07] Anchoring Andy
- [15:06] Steady Sandy
- [18:10] Progress principles
Resources & People Mentioned
- EBOOK – Your Game Plan to Market Volatility
- DFA – So What’s Your Plan for the Bear Market
- Morgan Housel
- The 10 Most Dangerous Words In Investing
- Three Crucial Lessons for Weathering the Stock Markets Storm
- How Not to Worry About a Falling Stock Market
- Morningstar – 6 Things to Know about Market Crashes and Declines
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