Fear in/off the stock market?
Use it!
Since the financial crisis of 2008-2009, we've actually been in calm waters in the stock market. The markets have performed well since then. We experienced a correction in 2011, and in 2018, there was a bit of a slowdown at the end of the year. Then in 2020, we had the Coronacrash.
What's noteworthy is that the corrections always came very quickly. The saying 'confidence comes on foot and leaves on horseback' didn't immediately apply. Confidence was restored very quickly each time.
Take, for example, the Euro Stoxx 600 index:
You see the enormous boom of 2000 and the rising market until 2007, and the periods it took for recovery. Now, look at 2020 and 2022; in terms of recovery time, it's actually unprecedented.
Also, take note of the total gain of the index since 1998, only 38% over 25 years! That's a CAGR of 1.63%. You can add your dividends to that, of course. Naturally, an index investor will periodically contribute additional funds.
If we express this index in dollars, it's still below the level of 2007.
If we then look at the S&P 500 over the same period as mentioned above, we get the following picture:
Here, too, we see that it took until 2014 for the index to recover to the level of 2007. If we then look at the brief dip in 2011, 2018, 2020, and even the decline in 2022 that was largely offset in 2023, those recovered in months, not years.
You can also observe the exceptionally long period of almost continuous growth after the 2008 crisis and the massive surge after Corona. It's not surprising that many investors today are alarmed by the stock markets declining again. It's also noticeable that index investors in the U.S. were in the right place, but in Europe, it was considerably less favorable.
Even investors with 13 years of experience haven't actually experienced a prolonged decline and slow recovery. Whenever it dipped a bit, the market cheerfully continued rising in the following months.
In short, there are currently many new investors, especially after the influx during the COVID-19 period, who have never really had to undergo the emotions of a significant correction or crash. And can you still call them new investors with more than 5 or even 10 years of experience?
I can well imagine that many, upon witnessing recent declines, become anxious and start asking themselves various questions
Am I going to lose all my money?
Have I made mistakes?
Will I incur significant losses if I continue to hold onto this or that stock?
Will I look foolish if others find out what I've invested in?
Are you increasingly comparing yourself to others?
It's perfectly normal to ask yourself these questions. Every investor experiences fear. It's how we handle this fear that matters. We can accept it or let ourselves be carried away on an emotional rollercoaster. We can also pretend this fear doesn't exist. We can give in to it or confront it head-on (fight or flight).
Everyone will react in their own way.
Charlie Munger, Warren Buffett's partner, once said: "All I want to know is where I'm going to die, then I'll just never go there."
Having fear is good. Fear is what keeps us alive. Someone who knows no fear will eventually come to a bad end. Having fear and still taking action, that's what we call courage.
However, fear is not our greatest enemy in the stock market. Not investing, neglecting our research, or giving up, that inflicts much more financial damage upon us.
Being courageous in the stock market certainly doesn't mean you should start speculating recklessly with various leveraged products or in the Forex market. Or borrow money to invest.
Being courageous in the stock market is about overcoming your fear and investing wisely. It's about buying stocks that no one else seems to want, but that you know (through study) are worth much more than the current market price. Tomorrow, I'll send you an example of that.
Having fear in the stock market is, therefore, a good thing. Be fearful, so you always do your homework well, but don't succumb to emotional actions or become paralyzed.
Kind regards,
Sam Hollanders