What Should You Do if the Markets Scare You?

Panic Button

Don’t hit this.

“To him who is in fear everything rustles.”
–Sophocles

Occasionally, I have clients who are sitting on a large pile of cash when, based on their age and their goals, it’s not appropriate for them to have so much money in cash or low-yielding accounts like money market accounts or CDs. When I press them on why they’re not invested more in the market, I usually get an answer that runs along these lines:

I’ve been looking at the market runup over the past few months, and I’m afraid that it’s hit its peak and as soon as I invest, the market is going to drop like a stone.

This is an all too common feature of living with Monkey Brain. He hates losing. He’d rather not play the game at all than to lose it, even if, over time, he has a really good chance of winning the game. As we saw in “Monkey Brain Confuses Rates and Raw Numbers”, he blows low probability chances way out of proportion in coming up with a story about why you shouldn’t do something.

That fear of losing is called regret aversion. Regret aversion is when we don’t take actions just so we can avoid the possibility of feeling regret after we’ve made the decision. It’s the reason that few people buy annuities, even though they’re economically a correct purchase for many of them. It’s why we never asked that girl we ogled over to Prom – we didn’t want to give her the chance to say no, disregarding that there was a possibility (albeit an extremely slim one in my case) that she could actually say yes.

Furthermore, when we look at markets and see that there’s been a run up and stock prices are hitting new highs, or, at least, were higher than they were last month, Monkey Brain rewrites a history for us and acts as if we would have invested way back when the market was at the bottom. Thus, according to him, we should have already had the money, and now that we don’t, we have to invest that much more aggressively to make up for what he perceives to be lost money. It’s the same reason that I tell you not to watch CNBC before you talk to me – perceiving a “missed opportunity” will simply stress you out, and when you’re stressed, Monkey Brain takes control.

So, rationally, you know that you need to be invested in the market, but emotionally, investing in a rising market scares the bejeezus out of you because you’re afraid that you’re going to be jumping on the roller coaster right as it’s cresting the top of the highest peak and will zip you along in the scare ride on the way to the bottom.

What do to?


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There are several tactics that you can use to help you overcome your fears. The U.S. national gymnastics team teaches the following to its athletes to help them overcome their fear of injury:

  • Stopping thoughts. When Monkey Brain throws a negative thought your way (“MARKET WILL CRASH MOMENT YOU CLICK BUY BUTTON!”), simply stop that thought. Replace them with useful thoughts like “this is part of my long term strategy” and “the market is just as likely to go up as it is to go down.” James Altucher has a useful method for stopping negative thoughts that I discuss in the article “101 Things I Need to Remind Myself of More Often.”
  • Develop a strategy that you trust and believe in and then execute the strategy. In gymnastics, coaches will prepare their gymnasts and give them support and guidance for their routines. The coaches and the strategies provide the gymnasts with the confidence that they can go out and execute and that they won’t get hurt.
  • Use positive imagery. Create a mental picture of what your happy future looks like and visualize yourself successfully achieving that happy future. This exercise will increase your self-confidence, and it will create a narrative that Monkey Brain will go along with. If you are telling Monkey Brain this wonderful story about your happy future, then you must have the capabilities to make it happen.
  • Progressive muscle relaxation. If you have stress, cortisone flows through your body. Monkey Brain thrives on cortisone to convince you to make bad decisions. My friend Laura Palmer at Bridgenosis has a great 4 minute video showing you how to relax your entire body.

Once you’ve taken these steps and realize that fear ain’t nothing but a thing, then you can take concrete steps towards getting back into the markets.

  • Don’t shoot for the moon. There will always be another Twitter IPO or great run up in stocks and there will be more declines. Trying to make up for what you perceive to be lost time will only make you more aggressive and make poor investing decisions.
  • Invest a little more. What you can’t make up for in lost (perceived) returns, you can make up for by increasing your savings rate. As we saw in “Sacred Cows Make Great Burgers,” savings rate is more important than rate of return. Since you think you missed out on the great run up, save more!
  • Value cost average. Value cost averaging allows you, in theory, to buy low and sell high. This will prevent you from chasing losses and trying to time the market. Simply having a plan and knowing what you’re going to execute can give you confidence that you’re not going to make a major mistake over the long run.
  • Keep your timelines in perspective. Remember how long of a time horizon you’re dealing with. You don’t have to make the picture perfect decision today or tomorrow or next week. In fact, you never have to make the picture perfect decision. You just have to keep making decisions that are, over time, more likely to turn out positively than not, and when over time arrives, you should be just fine.

Whatever you do, don’t do these two things:

  • Get frozen by analysis paralysis and never do anything. That’s a recipe for disaster. The purchasing power of a 0% return on your investments will be halved in just a couple of decades, and you’ll get to face a decline in your standard of living whether you want to or not.
  • Invest it all in some ultra-risky gamble to swing for the fences and hit a seven run home run. I’m all for taking shots, either in the market or in entrepreneurship, but those shots have to be taken with reasonable parameters set so that you’re not risking everything on green 00 on the roulette table in one spin.

The bottom line is that you’re never going to be able to time the market. If you got out of the market at some point for fear of a decline and watched it run up or you’re sitting on the sidelines with cash worried that it will drop after you’ve seen it go up (while you weren’t invested), you’ve proven that you can’t time the market. Almost nobody can, and if you can successfully time the market, you shouldn’t be reading this article or be on this website. Go hide somewhere, make yourself oodles of money, and don’t tell anyone about your system because the moment it becomes public, it’ll be useless, since the stock market is efficient, even if it’s not rational.

For the rest of us mere mortals, we need to have a plan, and we need to stick to it.

What about you? Have you ever missed a run up in the market and felt bad about it? Let’s talk about it in the comments below!

About Jason Hull, CFP®

Jason Hull, CFP®, is the Chief Technology officer of myFinancialAnswers, an online comprehensive financial planning service.

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