Feeling a little nervous about the recent drop in the market?
You’re in good company as it’s perfectly normal in this type of environment. In fact, we’d be surprised if the drop had not made you nervous as that is what the majority of people feel after a rise over 14 months long. Here are a few tips to remember that should calm your nerves:
Reverse Your Emotions
Successful investing requires turning emotions on their head. When most people are nervous is the time to see opportunity, and when most people are fearless is the time to be scared.
The stock market did worse during the 2000’s than it did in the 1930’s! Do you remember how you felt in September of 2002? Or even last February 2009?
These periods are when many people were giving up on the stock market. Fear had brainwashed their rational decision-making skills. If they would have realized in 2002 that their investments were about to go on a multi-year bull market ride, would their fear have been as pronounced?
On the other hand, people’s attitudes of early 2000 and October 2007 were ripe with optimism and fearlessness. This is a direct contrast to the fear and pessimism that are now dominant. Optimism makes people overpay for opportunity, while fear makes them overpay for safety.
It’s important to recognize that we will continue to have economic scares in the future (as we always have in the past). Economic Cycle Research Institute had a recent write-up about the lag effect in people’s perception after a recession.
Take Inventory of Your Short-Term Holdings
What percentage of your investments are in safe areas? The basic rule of thumb is to have 3-6 months of your living expenses in a safe place with little risk. This allows you some breathing room for the money you have invested in the markets. Knowing that you have a cushion of cash and bonds to access for your everyday expenses gives riskier investments time to ride through the stock market dips.
*Photo Credit: pasukaru76