The economic turmoil of the recent Recession, and its aftershocks, cut deep into our lives and our psyche. People are still suffering from the recession, which lasted from December 2007 to May 2009, here in March of 2011. Some of it is due to true economic hardship; other of it is due to post-traumatic stress syndrome (PTSS).
I’m not physiologist, and I don’t mean to make light of serious forms of PTSS, but I do believe that many people are suffering from a lighter form of recession PTSS. The smallest market dip has investors jittery, and I’m hearing worries once again of another recession. Investors who were able to withstand the last bear market are not so sure they’re up for it again. One sharp decline and they’re ready to bail out for good.
As an investment professional, I see signs of PTSS in myself. Other investment managers will remember the horrible, wrenching feeling of walking out of the office at the end of the day on any given day Sept 2008 – March of 2009, with the bloodbath that was Wall Street in your wake. Each day, my colleagues would mumble to each other on the way out the door, that we felt that we had just been physically beaten. Just one day of a down stock market brings back a flood of those bad memories.
The trigger for this PTSS is a volatile market. Now the storm is brewing – unrest in the middle East, oil prices spiking, the national debt load, and a hesitant economic recovery. Despite that fact that investors know that the stock market never goes straight up and that periods of decline are normal, it seems that all those invested in the stock market have an unusually itchy trigger finger, ready to sell at the slightest dips. Therefore, it’s worth a mention of the big picture: Investing in stocks is a long-term commitment, and guessing the short-term direction of the market is hazardous to your financial health.
You must choose the amount of your net worth that you are willing to commit to this asset class with this particular risk-return tradeoff. Once you choose, you cannot be shaken by short-term turmoil. Buying low and selling high inherently means that you do not sell, or allocate away from stocks, when the market is going down. It means the opposite, you buy stocks when they are low and economic uncertainty is at a peak. For the average investor it is extremely difficult to add new money during market declines, but at least by keeping your nest egg in place you avoid the money-losing pitfall of selling during a (real or predicted) decline.
Harli L. Palme, CFP®