Staying The Course Is Harder Then It Sounds – A Real Life Account


One of the most common mantras is stay the course. When everyone is panicking and selling out of their positions, you should hold firm and wait for a businesses performance and/stock price to rebound. After all you should never sell at the bottom – investing is all about buying low and selling high.

Whist staying the course may sound like a simple thing to do in theory – especially in hindsight when you get to look at the recovery of shares that got pummelled by the financial crises – it is much harder to do in practice. When you actually have your hard earnt money in the markets and you see the stocks you own falling like a stone and your money invested quickly disappearing by the day , it can be hard to act rationale. In the heat of the amount, surrounded by panic, you will definitely have persistent thoughts about selling. Have a look at the following thread to see a real life account of someone who sold close to the bottom of the market in the 2008 financial crises: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=25126

In the thread, you can clearly see the man in panic. His retirement funds are going down the drain and in one day alone he lost a a year’s worth of normal distributions.



This post just goes to show that psychology is important when it come stop investing. Even if you understand the basics such as :

  1. Invest you must
  2. Time is your friend
  3. Impulse is your enemy
  4. Basic arithmetic works
  5. Stick to simplicity
  6. Stay the course

it could be much more harder to execute in practice.

If the author of the thread had stayed the course, he would have tripled his money from the lows of the financial crises. Of course this is easy to say now in hindsight. But mental strength is important. Next time you think of panic selling, have a look at this post and the linked thread to ensure you do not act haphazardly and ensure you do not sell at the bottom!

I’ll leave you with one of the best replies on the thread linked above:

“We have the equity risk premium rising from two fronts now

Valuations are falling,but also the riskless alternative is now zero.

 

So what are investors doing–many are panicking and selling just when the expected returns are now far higher than they were when they were buying.

 

This type behaviour is exactly why investors earn Dollar Weighted Returns well below the Time Weighted Returns of the very funds in which they invest.

 

The great equity returns come from very short bursts that are unpredictable, the fat tails are 6x what a normal distribution would predict.

 

Here is an amazing stat. From 1900-2006 if you miss the best one hundred days you have less than your original investment. And that of course ignores 107 years of inflation. Of course the other tail is wide too–if you missed the worst 100 days your return grows astronomically. But those days are less than one tenth of one percent of the days so the odds of timing the market successfully are terrible, which is why Lynch concluded that far more money has been lost anticipating bear markets than in bear markets and Bernard Baruch said that only liars manage to be in bull markets and out of bear markets.”




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