Investor confidence is pretty similar to something I call “lake-ice confidence.” I grew up with a lake behind my house. When I was about 10, my friends and I loved to walk out onto the frozen lake. Of course, our parents told us not to do this, and that made the game all the more fun!
A group of us boys would walk slowly out onto the lake, testing the strength of our ice with our feet—but even more important—watching the reaction of the boy on our right and left. To be honest, we were all pretty nervous about that ice. Part of the way we decided whether we felt safe on the lake was to check our friends’ confidence levels. A single wince or misstep from one boy would immediately send us all scrambling back toward the shore.
Sometimes we’d go just a few steps back. Other times, we’d slide halfway back to the shore. And many times, we’d rush all the way back to safe ground. After a few minutes, we’d always screw up our courage and venture back out toward the middle of the ice.
But here’s what’s interesting: The distance of our retreat each time depended on lots of different factors. In a few cases, we’d race off the ice because we knew the water wasn’t frozen enough. But most of the time, we were relying on how nervous our friends were.
Many different factors can knock investor confidence
Our lake-ice confidence, I realized later, wasn’t always based on my friends and my outdoor know-how. We also let the ice scare us if our collective psyche was a little “off.” For instance, we might lose our ice confidence more quickly than normal if we were cold, tired or out of sorts because we had been bullied that day in school. These factors had absolutely nothing to do with the physical safety of the ice. But they shook our courage anyway.
Investor confidence in the stock market has a lot in common with my friends and that frozen lake. When and how far the market retreats (just like 10-year-old boys scrambling to and from the shore) depends on a lot of factors:
- The overall health of the economy
- Stock valuations
- How long the stock market has been going up, and
- The mental psyche of market participants
A loss of investor confidence can hit the Dow—and hard
Don’t underestimate that final, human factor. The stock market is not a perfectly calibrated machine that always runs a logical course. The Dow Jones goes up and down based on the best guesses of the actual people doing the investing. And investors sometimes get nervous. That’s because we can’t ever know the true value of stocks, just as kids can’t know the actual thickness of lake ice.
When the stock market falls and rises sharply, it’s usually because our collective confidence as investors has broken down.
For instance, analysts might be surprised by a stronger-than-expected employment report. That, in turn, could cause interest rates to rise. A rate increase can then cause worried investors to fret about inflation and its affect on the economy. Next, key investors get nervous and start shifting their stock allocations. Other investors see that their peers are shifting investments, so they get anxious and follow suit.
Just like that, the stock market starts to zigzag like crazy.
How investors can stay calm in a volatile stock market
It’s not always easy, but it’s definitely possible to keep your cool even when the Dow is spiking and falling. Here’s how:
- Plan for the long term. A good, extended-horizon financial plan takes drastic stock market ups and downs into consideration. A solid portfolio can weather some serious market blips, because as sure as the stock roller coaster goes down, it will also come back up again.
- Rely on an experienced financial sherpa. Professional advisors understand the financial landscape, no matter how harsh and icy it sometimes seems. They know when the ice (stock market) is safe to walk on and how to keep your portfolio on solid ground.
- Call on the virtues of a wise investor. In particular, a volatile stock market challenges you to maintain a lot of humility, patience and courage.
Do you have questions about your portfolio’s resilience in tumultuous financial times? Feel free to reach out to your RegentAtlantic Wealth Advisor or me anytime.
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