It is highly documented in multiple studies that when people see their portfolios take a 30%, 40%, 50% (or higher) hit, they freak out and sell. This has been the emotional reaction of people for decades. It’s the reason the stock market and S&P 500 may average 7-9%, but people average less than 4% in mutual funds.
Essentially, research shows that immediate pain can quickly overcome prolonged success. We want to end the pain NOW. So we sell to prevent further loss. Hence, losses get locked in. A concept I learned about from Tim McAleenan Jr. is to combat this with positive emotions.
Try this on for size. If you buy shares of Coke (KO), follow up by buying a 2-liter, a six pack, and perhaps some other knick knacks of Coke. Take these things and set them up on a visible shelf, perhaps in your office. Then when you get your first dividend check (if you can secure a printed one, if not print out a statement from your broker), frame it and add it to your collection. Then, everyday you will have a visual reminder how your holdings in KO are earning you money every single day for simply waking up and joining life.
When the next crash comes (and it certainly will), you will have a bit of solid, positive emotional energy built up. And you’ll soon discover that your holdings in KO continue to yield dividends despite the drop in market price. The big key is that someday, if you hold steady, you’ll collect enough shares, that the market loss you feel will actually be less than the total value you have accrued.
Crazy things can begin to happen. Crazy GOOD things. When you weather a few drops in the market and see KO holding its own, you begin to see these price dips not as tragedies, but instead, opportunities. When KO takes a significant beating in share price because some newbie investors are freaking out and dropping shares that have been paying increasing dividends for 50+ years, it may be YOUR chance to get more. (Which incidentally requires that you have some amount of cash on hand.)
Now don’t assume this article is all about buying Coke. Instead, it’s about recognition that you WILL feel negative emotional reactions when the stock market plunges in the future. To handle things, we need not only objective financial analyses to properly handle them, but emotional mitigators as well.