Everyone makes personal mistakes in life. Sometimes very big ones. We all face external adversity too. The combination of a big mistake during significant hardship can have a lifelong impact.
Your response to stock market challenges will play a role in whether you will succeed as an investor. In other words, the greatest enemy of the investor is not a falling stock market, but what you do in the midst of it.
Nick Murray, a financial advisor to financial advisors, put it memorably:
The stock market in the United States in our lifetime—I mean since World War 2—has gone down an average of 30% an average of every five years, kinda whether it needed to or not. And what was the difference in all that time between investment success and investment failure?
I will argue that it was the single mistake of mistaking the temporary declines for a permanent loss, panicking out, thereby creating the permanent loss that you said you were fleeing from. Whereas if you had just sat there—never mind adding to your positions which most people should be doing over most of their accumulating lifetime…—if you just sat there, the temporary decline will go away and it will be then followed inevitably by a period of above average returns. That’s the cycle.1
You may want to blame a politician, or a social media feed you follow, or a bad headline, a bad economy, or the prediction of a person with an impressive pedigree, but if you get out of investing at the wrong time it will likely be due to something within you, namely, fear.
There will come a moment in your investing lifetime when you will likely have to just sit there and take it on the chin as you watch the stock market plummet. This time is not now, as stocks have been soaring in 2024. But the history of the U.S. market demonstrates that this should not last forever.
Of course, every situation is different, but broadly speaking, getting out of stocks during a market downtrend could be the single greatest investing mistake you make. To borrow Murray’s language, allowing the temporary to trump the permanent is rarely, if ever, a wise decision in life.
How you handle adversity in life reveals your character. How you handle the declines in equities—whenever they begin—will impact your financial future and reveal who you are as an investor.
---
Sources:
1. Wealthtrack interview with Nick Murray released May 6, 2016. Quotation occurs at 11:00 minute mark. Accessed online: https://youtu.be/7lnwlBT6Al0?si=PmertuNoGgAVVMb6