You probably don’t need me to tell you it’s been a rough few weeks for the stock market. As I write, the FTSE 100 is down by about 10% in a month – and that’s even after bouncing off its lows. To be honest, the UK market has been on life support since early summer. In fact, the FTSE 100 is now 6% lower for the year. True, that negative return does not include any of the sizeable dividends that FTSE 100 investors will receive over the course of this year. But they won’t be enough…
You probably don’t need me to tell you it’s been a rough few weeks for the stock market.
As I write, the FTSE 100 is down by about 10% in a month – and that’s even after bouncing off its lows.
To be honest, the UK market has been on life support since early summer.
In fact, the FTSE 100 is now 6% lower for the year.
True, that negative return does not include any of the sizeable dividends that FTSE 100 investors will receive over the course of this year.
But they won’t be enough to push us into positive territory, anyway.
This means that – at least so far – investing in the stock market in 2015 hasn’t been growing our wealth.
It’s been devouring it.
The Fear Of Fear Itself
How does it feel to see your hard-earned money being scythed away by a hefty 10% in just a month?
Of course it does.
To a greater or lesser degree, we all feel like that at times like these.
You can’t help being scared and upset when markets fall sharply.
And the first thing to remember is: that’s fine.
Being upset or frustrated doesn’t make you any less of an investor – no more than having butterflies before your first date makes you any less of a potential life partner.
We’re emotional creatures, not robots. When traumatic things happen, we feel it.
All we can do – and it’s quite a big ‘all’ – is to use our rational powers of reasoning and perspective to try to ensure that our emotions don’t derail our long-term investing goals.
Your really great grandparents
If the first thing to remember is that we’re all human, then the second thing to remember is that you’re just an animal.
Now don’t feel insulted!
I’m just an animal, too.
We’re all heirs to a genetic inheritance, handed down from our parents and grandparents – and well beyond that through to prehistoric man…
And then further back to the apes, through the mammals and the first not-quite-a-fish that crawled out of the sea, and even further back beyond that.
It’d be quite a family reunion.
The One-Two Punch In Your DNA
For most of our countless ancestors, the threats to their wellbeing were not existential problems like “Is my share portfolio up or down?” or “Does my bum look big in that?”
No, our genetic predecessors lived by the law of kill or be killed.
It was the world of survival of the fittest, where you didn’t have the luxury of meditating on a problem, thinking outside of the box, or coming back to someone after the weekend.
Not if something was about to try to eat you – which it more often than not was.
So our ancestors had teeth and claws and suckers and poisonous glands and ways to flee or hide.
And deep within our brains and our sinews, the programming for living in a dangerous and unpredictable world is still written into us.
The Caveman In Clapham
Our genetic inheritance clearly has some fabulous plus points.
Even our most basic physical reflexes are still handy if you’re a professional sportsperson or if you’re confronted by a mugger in an alley.
Big brains, opposable thumbs and the ability to make babies laugh by pulling funny faces – these are not things you’d want to live without.
But at other times our genetic heritage is less helpful in the modern world.
I’m thinking specifically of our tendency to react first emotionally.
At stressful times we can be governed as much as any animal by the so-called “fight or flight response” – when, in reality, we’d probably do better to lie down or take a walk and ponder.
You see, on some deep level, your instinctual brain can’t tell the difference between a threat from a sabre-toothed tiger and the turmoil caused by watching your life savings going down and down in your stock-broking account.
You just see a threat, and your emotions make sure you feel the pain.
No wonder your first instinct can be to fight it (by trying to trade out of it) or to fly from it (by selling out to make the pain go away).
Yet usually in investing you’d be better off holding back such urges.
This means investing with the full understanding that you will feed bad when share prices fall.
Just Don’t Do It
However much you tell yourself that such falls are normal and to be expected – that such volatility is what scares other people away from equity investing and is thus the reason you can expect to earn more from shares as opposed to cash – there’s something deep inside you that doesn’t want to hear it.
Sure, some people will feel this emotional response more keenly than others.
We all learn to process and even repress our emotions as we move through childhood.
It’s why – the odd bout of road rage aside – we can live side-by-side in our millions without our cities resembling a kindergarten-cum-battleground by 10.00am each morning.
It’s also why we all have the capacity to invest in shares without panicking at the first whiff of a falling market.
By the same token, emotional factors figure in the good times, too.
When shares are going up, your natural instincts will encourage you to feel good and confident, and to double down and invest even more into the stock market – just the same as our instincts urged our forbearers to keep reaching out further along the rickety branch for another of those sweet fruits…
… until they overstretched or the rickety branch broke, and their overconfidence became their downfall.
Think when others aren’t thinking
You can probably see where I’m going with this.
It’s all another way of appreciating why investors should focus on the long term, and all that data which suggests that the UK market will go up over time and make you richer, despite these occasional setbacks – especially if you reinvest your dividends.
It also explains why Warren Buffett says “Be greedy when others are fearful” rather than “Invest like an automaton or Mr Spock’s bookish cousin on beta blockers”.
Even an investing legend like Warren Buffett knows about and feels emotions.
Buffett seeks not to deny them but instead to be ready for them – and to try to confound them with the more rational parts of his brain.
We’re all animals and hence prey to our base emotions.
But with insight, strategy and a long-term perspective, as investors we can be so much more.
Yes, we're in it for the long haul here at the Motley Fool, and we focus on investing in great businesses for years rather than months. It's over that kind of time horizon that we can make sensible judgments on how a business is likely to perform, and whether the price is right.
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