Looking back, you wish you'd invested right after the 1987 crash or at the bottom of the 2000 - 2002 bear market. Why didn't you? You were scared, right? The world as we knew it was ending, and the prudent thing was to stay on the sidelines for the foreseeable future. But by now you've learned the lesson: next time something like this happens, you will be a buyer, right? Well, how about now? Why aren't you buying? Why are you looking instead to move your 401(k) into cash to protect whatever is left of it?
Human nature. The theory is simple: buy low, sell high; the time to buy is when blood is running in the streets. The reality is a bit more complicated. Market declines are caused by selling. Since people act in their self-interest, the reasons that cause them to sell must be substantial. Otherwise they won't act.
Suppose you were told that next week stocks are going to dip 10% but will come right back up because things are just fine. Would you take advantage of the buying opportunity? The problem is that stocks won't dip if "things are just fine." For stocks to dip 10%, enough people have to be motivated to sell - i.e. they must perceive a potential problem down the road that warrants their action now. The problem must be REAL - or people won't believe it. And won't act.
Professional traders thrive on volatility. So a lot of "problems" in the market are created daily just to motivate people to trade: opinions, ratings changes, warnings, predictions, new ideas, etc. There is a word for it - manipulation. But that's daily fluctuation. For a 10% correction, enough people must be thinking and looking in the same direction. In other words, the problem must be big enough for enough people to be motivated to act on it.
So a 5% drop is normal - it's just volatility. A 10% drop - there is a problem enough people are concerned about. A 20% drop - there is a serious problem. A 30% drop - run for cover, the world is ending.
Now, the key here is the word "perception". Humans have emotions; they are susceptible to persuasion and prone to exaggeration. When we see a problem, few of us have a real grasp of it; the rest "perceive" it to be something it may or may not be. The media obliges. Since crowds are only drawn to things big, having just a regular recession or a cyclical downturn is not newsworthy. But if there is a "crisis bigger than the Great Depression" - now, that makes for a good juicy headline! In the market, most problems are not as bad as they are thought to be, or they can be overcome by means not anticipated or mentioned by doomsday peddlers.
That's why the current bear market will end sooner or later and the good times will return. I don't know how or when, I just know they will because they always do. (As certain as every bubble - tech stocks, real estate, oil - is never a bubble until it bursts.) If you disagree, you are probably mentally listing the reasons why this time it's different or busy cashing out your 401(k) - just in case. And that's exactly my point: for a perception to take hold, the MAJORITY must believe it.
Now, this is not an all out call by a starry-eyed optimist to start buying with abandon. I believe prudence is in order and capital preservation is the key. It is just an attempt to put things in perspective. A reminder that history will once again repeat itself, that right now "this time it's different" but a couple of years from now it will be "I should have invested back when..."
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