Don't Cry Over Spilled Stock Prices

Emotion loves to play with our heads.

• What are others buying?

• What if the stock price drops?

• If only I can sell at the top…

• I heard that on TV. I’m getting in…

We say these things when we start acting on emotion.

Peter Lynch was a famous fund manager at Fidelity in the 80s. He did so well that he retired at age 46. There may be some luck involved, but his strategy and discipline are enormous factors in his success.

His quote above highlights not only the power of greed and fear, but their effect on our own investing behavior.

A recent study in 2021 showed that during extreme market volatility, investor sentiment fluctuates significantly. A large number of investors, affected by their own personal emotions and those around them, will have an effect on the normal, balanced state of the market.

Guess what happens to our behavior when these emotions drive our behavior? Yup - irrational decision-making.

The Volatility Index (VIX) is an actual market index that measures volatility. But it has a nickname - the “Fear Index.”

Notice anything compelling in the graph below? The gauge of fear in the market occurred during times of extreme uncertainty - COVID in 2020; the Great Recession in 2009; the Dot Com Bubble and 9/11 in early 2000s.

At these moments people tend to act based on fear and irrationality. Decisions based on your goals, risk profile, and time horizon fly out the window once we hear dramatic music and see financial TV screens turn red.

Peter Lynch was an expert at turning off this behavior. His stellar returns were a result of a number of factors: diligent research, a little luck, but most of all - removing emotion from his work. He relied on systems he set and approached his investments in a rational way.

So what can we do?

Take a deep breath, to start. Remember, panic and emotion can last for a prolonged time, but it doesn't last forever. In order to avoid Dr. Jekyll from taking over your portfolio, set up automatic transactions that occur on a regular schedule. Utilize automation tools to act on your behalf. Write down your own rules/goals and post them on your computer, bulletin board or journal. Follow them, at all times. Spend less time looking at your portfolio and more time reading books, playing with your dog, going for a hike or enjoying the sun. Life is way too short to ignore these moments.

We may not ever be as successful as Peter Lynch. But if emotion and fear run our portfolio, we certainly don’t stand a chance.

Save On,

Chris