When Investing, Know Thyself
If you’re around my age (32), for most of your adult life you’ve known a growing economy, a rising stock market, and increasing home prices. You know logically that good times don’t last forever. Deep down, you know corrections, bear markets, and recessions are in your future. You’ve heard that any given year, 80% of active managers (whose literal job it is to invest people’s money) lose to the market every year (according to CNBC), and that the remaining ~20% probably won’t beat it the following year.
Definitions and Statistics:
Correction: market decline of more than 10%, but less than 20%. According to the Motley Fool, there have been 39 corrections in the last 72.2 years. That’s more than once every 2 years.
Bear Market: market decline of more than 20%. According to Investopedia, there have been 14 bear markets since 1947. Not every bear market leads to a recession, but most do.
Recession: when the economy shrinks for two or more quarters. This can mean higher unemployment, lower retail sales, less manufacturing output, etc.
So how does it feel when things start to turn South? How does it feel to see the value of your portfolio drop or your net worth plummet? I mean it. Sit in those feelings for a minute.
Now is a great time, while we’re young-ish (Back pain, anyone? Just me?) to learn how we react to adverse market conditions, whether it’s the stock market, cryptocurrency market, housing market, whatever. The question “How would you sleep if your portfolio lost 10% of its value?” becomes a lot easier to answer when it actually happens.
Take this market opportunity to learn who you are as an investor and invest accordingly going forward. If having a lot of debt keeps you up at night, pay it off. If seeing your crypto drop 50% upsets you, maybe that’s not the asset class for you. Learn now because it will save you money and heartache in the future. You’ll keep yourself from acting on emotions and making costly mistakes, like buying high and selling low.