The Best and Worst Days In Stocks
Investment FOMO (Fear of Missing Out) cuts both ways for emotional investors. When stocks are soaring like they were in 2021, investors want to make as much as they can and take additional risk to make BIG money. But risk is 2-sided, when it comes to missing the best and worst days in stocks.
Taking more risk feels great when stocks are going higher and account values soar. But, when they go down, like what’s happened in 2022, it’s painful. This pain can lead to emotions of the opposite feeling of FOMO, which I describe as “OH HELL NO!” That’s what a weak-minded investor says when they finally throw in the towel after seeing their account value drop to a certain point. Their feelings have taken full control of the rational thought process of investing. This is often justified by the investor trying to rationalize that this is a smart decision. They attempt to stop the bleeding by selling to put in cash or change the investment strategy to something much more conservative.
The pain of losing can become too much for these people to handle. This is despite the fact that investments, after sharp drops in stocks, are now “On Sale” in most market downturns based on the price drop and the future earnings of the company referred to as PE (Price/Earnings) ratio.
S&P 500 Valuation Measures
Psychology and Investing
That phrase “On Sale” in the retail world brings in shoppers looking for a bargain. In the investment world, it drives away weak-minded investors, leaving the rich to come in for the bargains.
Remember, when someone sells a stock, another person buys it. Investing is rational and mathematical. However, humans psychologically equate money to food, shelter, and water – the basic necessities of life. Naturally, we want to avoid the potential of losing those 3 basic necessities.
Most rich people aren’t even thinking consciously and, in some cases, even subconsciously about their basic needs because of the level of money they have. The bottom 90% of individuals, outside of the statistic of “Rich,” are likely those selling at the wrong time out of fear. There’s a reason rich people become and stay rich. It’s because of good decision making.
Best Days for the Stock Market
Many large declines are followed by large increases in stocks. Often individual investors that let their emotions get in the way end up selling near the bottom vs holding on, or better yet investing more money.
Below is a pie chart showing this to be true with 50% of good days happening in bear markets. The bar graph also shows the perils that can happen, if someone missed the best 10 days in the stock market over the last 30 years vs being fully invested all day. The difference is dramatic!
Worst Days for the Stock Market
Investors have tried unsuccessfully for decades to try and dodge market drops only to end up not getting back in for the best days in the stock market. Timing the market is always a bad idea. Trying to avoid the worst days in the stock market is almost certainly going to lead to missing the best days in the stock market. Over and over again, research proves that investors of all wealth levels are not good at timing the market successfully over time.
The best advice is to just stay invested. And, most importantly, stick to a long-term investment strategy.