As Mike Tyson once said, everyone has a plan until they get hit in the face. On Wednesday, Federal Reserve Chair Janet Yellen inadvertently delivered a blow to investors when she suggested long term interest rates could be rising in as soon as six months. Then the stock market dropped over 1% in the blink of an eye.
By Friday morning stocks had recovered all those losses and more. It’s easy to blame computers and day traders for the volatility, but individual investors get scared out of their positions more often than they’d like to admit. Thousands of investors came in to 2014 planning to buy and hold stocks forever only to get shaken out by Russia, China and this week Janet Yellen.
“Despite the S&P 500 (^GSPC) being at all-time highs, the collective market participant is still a basket case,” says Yahoo Finance’s Phil Pearlman in the attached video. A trained clinical psychologist, Pearlman says the problem starts with our mental hardwiring. Humans are instinctively loss averse to the point of acting against their more rational decisions under stress.
You don’t have to be Charles Darwin to figure that there was a natural selection bias towards our ancestors who were inclined to err on the side of caution when predators could be near.
Pearlman is quick to note that a sense of distrust towards Wall Street is understandable. The last 15 years have seen two massive crash events followed by a 5-year rally driven by open government manipulation.
The best defense against churning your portfolio is making a plan then stepping back from the market. When Janet Yellen speaks it’s newsworthy but not actionable. The same goes for pushing and shoving between the U.S. and Russia, Malaysian jets and Ukraine. The world is always scary but it hasn’t ended just yet. For more than two hundred years patient investing has outperformed hyperactive trading.
In other words Wall Street tends to reward those who do exactly the opposite of what their gut is telling them to do.
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- Janet Yellen