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Do you want to make money in the markets?
Since you’re reading an investing newsletter, the answer should be “yes.”
However, many of you don’t put words into actions. I recently made a post to my 120,000 social media followers about how the Federal Reserve cutting interest rates is good for stocks and crypto.
This is not a controversial opinion; when the Fed cuts rates it makes it cheaper to borrow money for things like houses, cars, business loans, etc. and helps "stimulate" the economy. This is good for risk assets, especially “high-beta” assets like small caps and crypto.
While this is covered in any economics 101 class, the majority of the comments were like this…
…and this…
…and this…
…which tells me that a lot of people in my audience have investing PTSD from the last few years.
And I’m here to give you the antidote.
Everyone Has Some Investing PTSD
In his classic The Psychology of Money, author Morgan Housel discusses how financial experiences shape our opinions on money.
Just as individuals have unique journeys that inform their perspectives on finances, investors too carry their history—both triumphs and traumas—into their decision-making processes.
For instance, if you started investing in 1999 you are probably wary of investing in tech stocks as you might have experienced the bursting of the dot-com bubble firsthand.
This traumatic market event could lead you to be overly cautious or skeptical about the tech sector. And unfortunately, you would have missed buying some of the market’s best performing stocks over the last 20 years.
Similarly, someone who began their investing journey in 2008 during the Global Financial Crisis might have a deep-seated fear of market volatility and financial instability. I saw this crop up during the regional banking crisis last year.
While I tried to assure my audience the regional bank crisis was counterintuitively good for stocks…
…many thought it was the start of the next crisis and that I was spreading “dangerous information.”
Not that I’m keeping score, but the S&P 500 is +31% since the regional banking crisis started nearly one year ago…
…so my thinking actually wasn’t “dangerous.” In fact, it was both practical and prescient.
Lastly, investors who entered the crypto market in 2021 and saw the massive drawdown in 2022 may harbor reservations about investing in digital assets. Watching the rapid ascent of Bitcoin to nearly $69,000, followed by a dramatic fall, could leave a lasting impression of volatility and risk.
This experience might make them hesitant to reinvest in crypto, even as the sector matures and offers new opportunities for growth.
I can confidently say that everyone has a little investing PTSD. At the same time, many investors want to be the one to foresee a market crash before anyone else and be immortalized like Michael Burry in The Big Short.
But this is the real world, not Hollywood. And keeping these three lessons in mind can help alleviate some of your investing PTSD.
#1: Remember Bear Markets and Crashes are Rare
I know some of you have investing PTSD from the 2022 bear market.
And while bear markets can shake even the most hardened stock market veteran, it’s important to remember that bear markets are rare.
A study by NYU Stern School of Business showed that from 1926 to 2022, the U.S. stock market had positive annual returns in approximately 76% of the years, indicating a general upward trajectory.
That means every year US stocks have a down year, stocks rise for three years.
Going one step further, bear markets are historically much shorter than bull markets.
The average bull market lasts 991 days compared to 289 for bear markets. That means bull markets last nearly three-times longer than bear markets.
And whether it’s the Great Depression, World War II, 9/11, or COVID-19, the S&P 500 has always recovered to make new all-time highs. This is a core reason why I hold a large percentage of my portfolio in S&P 500 ETFs.
And really, you should to.
#2: Volatility is Normal
One of my investing mentors once said new investors have an “itchy trigger finger.”
They want to find any and all reasons not to invest. It also doesn’t help if you have an unhealthy mental diet and consume content like this:
Creators like him always focus on the worst things happening in the markets. They want you to focus on what could go wrong rather than what could go right (and, of course, buy their overpriced course).
But as Peter Lynch put it 40 years ago, markets tend to climb a “wall of worry.”
Lynch says investors constantly face a barrage of worrisome information. This includes economic downturns, geopolitical issues, or market volatility… like a looming recession, War in the Middle East, and hyperinflation.
Despite these worries, Lynch encourages investors to maintain a long-term perspective. By navigating through the "wall of worry" and staying focused on the fundamental strength of their investments, you can benefit from the overall growth of the market over time.
There will always be things to worry about. But selling your stocks when things look “bad” is the worst thing you can do.
#3: Keep Your Politics Out of Your Investments
I know it’s an election year and everyone is polarized.
But investing should be one of the places where everyone checks their political opinions at the door.
Making investment decisions based on political bias can cloud judgment and lead to missed opportunities or unnecessary risks. Plus, it simply doesn’t matter who is in office when it comes to stock market returns.
In fact, a study examining market performance from 1945 to 2020 found no significant difference in annual stock market returns between administrations of different political parties, with an average annual return of around 11%.
While this is a hard pill for some to swallow, it’s best to remain objective and not let your political opinions cloud your judgement.
Tune Out the Noise (And Keep Buying)
Navigating the complexities of investing requires a balanced approach.
You need to be informed not just by the echoes of past experiences but by a clear view of the present and future potential.
Remembering that bear markets and crashes, though daunting, are relatively rare, and that volatility is part and parcel of the investing landscape, can help maintain a steady course.
Moreover, detaching political biases from investment decisions enables a more objective analysis of opportunities and risks.
Keep these principles in mind, tune out the noise, and let's keep our eyes on the prize, capitalizing on the opportunities that come about on our investing journey.
Stay safe out there,
Robert