In response to market gyrations caused by election results, long-time Wall Street Journal columnist Jason Zweig suggests, “calm down.” He writes, “Common sense says ‘calm down.’ One of the most important principles of investing is to let your rules—not the headlines—make your decisions for you.”
He continues:
The Nobel Prize-winning psychologist Daniel Kahneman liked to say the human mind is a machine for jumping to conclusions. Big news is vivid and immediate, so we naturally extrapolate it into the longer-term future. The occurrence of an extreme event makes other drastic outcomes feel more likely, no matter what the historical probabilities indicate.
Investors chronically overreact in the short run, becoming excessively optimistic about probable winners and unduly pessimistic about likely losers.
Fight Temptation to Time the Market
When market performance gets choppy, some investors will inevitably want to sell everything and wait it out. Research has found that this strategy is not often successful. This effect has been cataloged by the long-running Quantitative Analysis of Investor Behavior (QAIB) performed by DALBAR. Louis Harvey of DALBAR writes:
It is worth reiterating that the biggest mistake that panicked investors make is failing to reenter markets after a downturn. In doing so, they lock in their losses, miss out on the recovery and are then prone to being haunted by the “Doom Echo” – a form of loss aversion that will hamper them from stepping back into the markets. This hurts investors and is certainly something financial advisors would prefer not to see happen to their clients or the investing public.
Research by J.P. Morgan also suggests that staying in the market is better for investors than missing the best days of return by being out of the market. The company’s 2026 Guide to Retirement explains:
Losses hurt more than gains feel good. Market lows can result in emotional decision making.
Taking “control” by selling out of the market after the worst days is likely to result in missing the best days that follow. Investing for the long term in a well-diversified portfolio can result in a better retirement outcome.
The Best Days Follow the Worst Days
Most critically, they explain that the best days often follow right behind the worst days, so making a rash decision based on short-term performance can compound the problem fast. They explain:
Six of the 10 best days occurred within two weeks of the 10 worst days
• Five of the six best days occurred after the worst days
• The second-worst day of 2020 — March 12 — was immediately followed by the second-best day of the year
Your Survival Guy has been warning you against market timing for years. But it’s never bad to be reminded when the going gets tough.
Action Line: You need a plan you can stick with through the good times and the bad. When you want to talk about a plan for your retirement, email me at ejsmith@yoursurvivalguy.com. And click here to subscribe to my free monthly Survive & Thrive letter.
