I guess I agree with Trent with the caveat that philosophies can change through education. If someone is scared of losing in the stock market, maybe there are a few things you can say to make them feel more secure, but in advising total strangers I can see how that would be way more responsibility than one may want to take on. I wouldn’t do it, but I also wouldn’t encourage their philosophy. I guess I’m somewhat of a coward :)

To quote Blaise Pascal via Warren Buffett:

“All human evil comes from a single cause, man’s inability to sit still in a room.”

@disavow: I think you are slightly confused on what “loss aversion” actually is. Without getting into too much technical detail, it is a trick one’s brain plays on them that causes that person to want to avoid loss. It manifests when things like market downturns occur and people flock to the exits. It is something that one should identify and control lest it cause one to make rash decisions.

What you are getting at is risk tolerance. That is something that everyone must understand and use for the basis of their investing. However, if one decides that the stock market is within their “risk-tolerance” and puts their money in and then later gets nervous during a downturn, they should ask themselves if they truly mis-interpreted their risk-tolerance, or, if it is more likely that they are just suffering some “loss aversion” and need to sit on their hands for a little while?

1. In reference to money markets and bonds, you said “but they will always return in the positive.” Not true. Bonds lose money due to credit and interest rate risk, among other things, although they are not as volatile as equities.

2. The investor’s greatest risk to their portfolio is often the investor. We buy into a rising market and, out of fear, sell into a declining market. Check out any fund on Morningstar, click Total Returns and then Investor Returns. Investor returns shows what investors as a whole actually made based on money flowing into and out of the fund. Many, many funds show investor’s actual returns as less than the funds returns because they buy high and sell low.

Living through down markets without selling is no fun, but it is the only way to achieve some level of success as an investor.

Most of the people criticizing my advice are coming from a different philosophy and a different risk tolerance. That’s fine, but I don’t criticize their philosophy and I think it’s pretty cheesy to come in and slam mine. It’s a difference in philosophy, period.

I have been reading your blog for awhile, enjoy it, and have learned a lot from it. I agree your investment advice is something you need to improve and I think it’s because you read too many mass-market PF books. Still, you write a good mix of content and I am glad you post as often as you do.

Personally I have around 40 years until retirement, so my only question the past week has been what to buy.

—-

Every time I see anything on the news about credit-nation, housing bubble, inflation… I turn to my wife and say “That’s why I’m very comfortable that we just used that money to pay off all our c/c’s”.

I totally agree that now is a great time to have zero personal debt – certainly zero CONSUMER personal debt (ie, c/c). Every time there’s talk of a rate rise (they just put our mortgage by $30/mnth last week) I’m not terribly upset, because if that’s the worst that’s going to happen to us through all this then we’re sitting pretty.

If you enter and exit the market because you “feel” good or bad about it, then you are a fool. Period. And a fool and his money are soon parted, as the saying goes…

Ever heard of “loss aversion”? It’s the psychological theory that humans are much more averse to suffering a loss then they are to acquiring a gain. It’s a fascinating behavior and it is absolutely at work here. The market correct 10% and people are getting all panicky.

Me? I’m gearing up for the fire sale!

I just wanted to point out a quote at BusinessWeek today from the revered John Bogle:

“Even if I was pretty confident that the decline will continue—and I think it’s more likely than not—you’ve not only got to get out right, you’ve also got to get in right. You must be right twice. So if you get out now, and the market goes way down another 15 or 20%, which is quite possible, they will be so scared they won’t get in.”

I’ve seen many people the last few weeks freak out about the stock market who don’t normally pay attention, mostly because its swings have hit the mainstream media. !wanda! above had it right. 1.Pay down debt 2.breathe 3.educate yourself to have a good plan. 4.reallocate if need be (like you suggested, if you just aren’t comfortable).

Link to the Bogle interview:
http://tinyurl.com/ypfz6l

Trent, I’m disappointed by your advice. This is the exact moment that people need to “hold on tight” and keep DCA-ing and not pull out of the market. Anyone who takes the long-term view could see that. Now is the time to “practice what you preach”. Keep DCA-ing, hold-your-positions, don’t watch the markets daily.

Instead, I see many pf-bloggers (who I, at one time, respected) suggesting people should listen to their fear and doubt and pull their money out now. BFP has even pulled their investment out while making (lame) rationalizations. (BTW, FCN gets kudos from me for sticking to his guns.)

Finally, Trent, don’t get me wrong, I enjoy your site. But, frankly, between this post, the Stock Options “advice”, and the “investing a 50 million dollar trust” post, you have to admit that your investment advice over the past few weeks has been less than stellar. I understand that you’re “just a guy” and your advice should not be taken as gospel, but consider that some of your readers will attribute some expertise to your advice as opposed to, let’s say, their neighbor.

-Toby

The article I referenced in Money is about how we’re biologically still cavedwellers with cavedweller brains. We react the same way to market crashes as we do to bear attacks: panic first, think later. It’s just how we’re wired, even if we can drive nice cars and live in air-conditioned houses.

That’s why I disagreed with the way your initial advice was phrased: I felt you were advocating a fear response. We should determine our risk tolerance, invest, and then stick to that strategy. I see that’s what you’re advocating here and totally agree!

I had issues with your previous sentiment, but not to this one. Life’s too short to worry about this, not to mention that if you’re worried, it means you are uncertain of the outcome, which means you’re gambling. Which is fine for entertainment, not so much for your retirement. :)

Reminds me of a Warren Buffet quote. Where is it, now…

Ah, yes. When asked about his reluctance to invest in tech during the bubble, he said:

“That’s not to knock Microsoft. If I had to bet on anyone, I’d bet on Microsoft. But I don’t have to bet.”

And neither do you, dear reader.

Make a wise investment, then, in the words of Tony Soprano, just “Fuhgeddaboudit.”

If you need the money in the short term and can’t ride out the volatility, then you never should have made that investment in the first place.

I htink your basic advice about not investing outside of your comfort zone is good advice though. Maybe your commenter invested in stocks when everyone thought they were great, and now wants to sell when everyone thinks things are bad. This is the worst case.

Good luck

On the other hand, somebody who is jumping from joy when a specific stock goes up 1 point only to loose sleep when it dropped 1 point probably shouldn’t be in the market. But selling every time there is panic is probably not a great idea either. I do think that it is important to haven enough money outside the stock market for emergencies.

I don’t really see a big problem in one’s primary home loosing value unless one needs to sell or refinance or the drop seriously affects the neighborhood. If you plan to live there long term and if you like your place than why worry? I do think the housing prices may go down more — I just don’t see how young people can afford to buy now (at least not here in Northeast) when the prices are so inflated because people bought places they couldn’t afford. Not that I know much.