Jordan Rosenfeld
5 min read
When the stock market makes big moves, particularly down, it’s easy to get spooked. New and less experienced investors are more likely to react to these moves by waiting or pulling out of the market.
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Powered by Money.com - Yahoo may earn commission from the links above.If recent stock market volatility has you scared and you think you’ll hold off on investing any further until the market feels “safe,” you are likely going to miss out on corrections and future gains.
Finance experts explained why waiting for a “safe time” is just fear talking, and what to do instead.
Humans are hard wired to avoid danger, so it’s understandable that your reaction to people crying over portfolio losses is to halt your investing, according to Carson McLean, a CFP and founder of Altruist Wealth Management. “Our brains crave certainty, and investing rarely offers it,” he said.
The problem is that most newer investors don’t realize that “the cost of waiting often isn’t obvious in the moment,” McLean said, “it shows up in lost opportunities and the erosion of purchasing power from inflation.” Playing it safe is a move he called “quietly expensive.”
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If you’re following the reactive behaviors of others whom you know who are also panicking about a change in the market, you’re probably engaging in “herd behavior,” which Robert R. Johnson, PhD, a certified financial analyst and professor of finance in the Heider College of Business at Creighton University calls “a wealth-destroying activity.”
Following the herd leads to mistakes in both bull markets (markets up) and bear markets (markets down), he said.
On the other hand, some people may think they have an edge and can read “when to get in or out before everyone else,” McLean said. But to successfully time the market, you have to be right twice, getting out and getting back in, and be faster than everyone else trying to do the same thing. In other words, highly unlikely.
Johnson paraphrased Vanguard founder Jack Bogle who said, “After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know of anybody who knows anybody who has done it successfully and consistently.”
Fear-based investing is emotional and reactive. In most cases, people aren’t being tactical, they’re reacting to headlines, McLean warned. “By the time it feels safe, markets have usually moved on,” he said.
