Why is it that we are so pessimistic when the market is falling and so optimistic when it turns around has a nice recovery? When the market starts to go down our first reaction is to find safety, all of a sudden we believe that risk levels have increased and we need to protect ourselves. Our normal investment time horizon is dramatically shortened and we will extrapolate the current trend down to the worst case scenario. Thoughts like, “I won’t let this happen to me again, I need to sell my stocks, or what if this keeps getting worse, shouldn’t I do something now” are common. As the news keeps getting worse, all we can think about is what will be the catalyst to take the stock market out of its tailspin? For some reason, we hit an invisible wall in May and June and the bad news came out in droves taking the stock market down as a result. And just as the doom and gloomers were about to gloat, a catalyst appeared. Suddenly the things that we were worried about back then, Eurozone defaults, rising Libor, double dip recession, faded into the background in July and the market decided that great second quarter earnings were more important than the news in Greece.
Our instincts and emotions conspire against us at the wrong times and force us to make the wrong moves. Don’t let this happen to you. Good stocks do not become riskier when the market goes down, in fact they become less risky. Always keep in mind that stocks are like any other product we shop for, don’t you want to buy stuff when it’s on sale?
