Don't Leave, Stay!
Updated: Aug 16, 2021
Did you know that since 1950, all 38 official stock market corrections in the S&P 500 (declines of at least 10%) resulted in a rally of its price? The recent market downturn we saw in 2020 is a prime example of that. So, in understanding this, why do so many people sell at the bottom of the market instead of waiting for the market to rally?
1. People aren't considering their risk tolerance and are overextending their position in certain asset classes
This is a significant factor as it's easy for people to put themselves in a position where they're heavily invested in a particular asset class - whether it be because they're bullish on the investment or because they haven't evaluated their risk tolerance. Regardless, it would help if individuals understood how much money they're comfortable putting in the market and not taking out, despite sudden market corrections.
2. People become fearful of losing their money
Fear is a powerful emotion. This emotion is so strong that it can elicit us to act irrationally in an attempt to save what we fear losing. In terms of the stock market, it's our capital. Despite any analysis that was potentially created ahead of time, when people see the market taking a nosedive, many people immediately think to sell. But that's not the philosophy you want, and that's not the philosophy that's going to make you money in the long term.
Take it from Warren Buffet, "Buy when others are greedy and sell when others are fearful."