Panic or Patience when the market feels like a roller coaster

Here are some actual headlines from a few days ago, Monday August 24, 2015:

U.S. Stocks Plummet at Open; Down Drops 1,000 Points

Dow Falls Whopping 1000 Points Opening Bell

With our 24-hour news cycle, it’s easy to be distracted—if not panicked—by headlines like this. But, consider what would have happened if you did as many investor opted to do and liquidated your portfolio following these gloomy headlines on Monday morning.

You would have locked in an enormous loss, which by the end of the day was cut in half!

In fact, as I write this post, the market is down 204 points: certainly nothing to celebrate, but imagine if you had sold when the deficit was 1,000 points!

On his Twitter page, Richard H. Thaler, the Ralph and Dorothy Keller Distinguished Service Professor of Behavioral Science and Economics at the University Of Chicago Booth School Of Business, provides the following advice to investors when the market starts to swing: “Inhale, exhale. Repeat. Then watch ESPN

Along with this advice, Professor Thaler, who I had the privilege to study under in business school, provides a chart that illustrates—regardless of how fickle the stock market can be—it continues to grow and those who take a long-term perspective will benefit from that growth—even though is sometimes may feel like a roller coaster ride.

As this New York Times column “How Emotion Hurts Stock Returns” details, the “fight or flight” reflex is one of the most basic human instincts and one of the most powerful. In fact, the average investor feels twice as much grief and regret after losing $1,000 in the stock market as she would feel from gaining $1,000 in the market. It makes sense, really—we’re hardwired to avoid danger and risk. So fear is much stronger than joy.

But it’s not necessarily more profitable, as Professor Thaler’s advice suggests.

Keeping your cool is difficult, but vital to your success as an investor. As I wrote in “The Emotional Traps of Financial Investing” fear is one of the most difficult to manage emotional traps for the average investor.

On the Friday, August 21, another New York Times writer Ron Lieber, gave his readers some excellent advice—even before the full impact of the downturn was known. When the market is fundamentally sound—but volatile—, Lieber recommends the following: “Advice After Stock Market Drop: Take Some Deep Breaths, and Don’t Do a Thing

This is excellent advice. Of course, there are rare times when one should liquidate. As I wrote in “When Analyzing Risk, Leave No Stone Unturned”, the 2008 crash was a rare exception. That, as we all now know, was not market volatility but a real flaw in the market based on mortgage-backed securities with greatly inflated values. But, in the absence of an extremely unusual event such as this, being patient is the better part of valor when it comes to investing for the long-term.

If you would like to comment or have a question, please email me at

Contact Carol »

Subscribe to our mailing list

* indicates required