The Good, The Bad & The Ugly
April 13, 2021
Stock market declines can lead to different emotional and financial outcomes, writes Peter Watson.
There are three dimensions to a stock market decline.
One. The good.
Expected returns on stocks are significantly higher than expected returns on less risky asset classes like bonds.
If you want a higher expected return, you must accept higher risk. That is how markets work.
Yes, stock market values can decline and looking at the S&P 500 Index over the last century, stocks lose money about one year out of every four years.
There has never been a stock market decline that has not fully recovered and gone on to reach new highs.
Two. The Bad.
Most humans are not well suited to losing money. Even if losing money is just part of the journey towards making money over a longer period of time.
Stock values can go up and stock values can go down. Intellectually that is a simple and understandable concept.
Emotionally it can be a terrible experience. Fear, anger, remorse, frustration.
Three. The Ugly.
Investors watch their portfolio value plummet. Then they sell at a significant loss. While they remain out of the market, they watch the stock values rebound fully and continue to rise.
Emotionally and financially, that is the worst outcome.
Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Watson Investments.