Author Topic: How do you mentally deal with large market losses?  (Read 4535 times)

FIRE47

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How do you mentally deal with large market losses?
« on: July 25, 2015, 07:07:54 AM »
I am relatively new to the game by nature of my age however I have been out of school for 3 years and have accumulated a decent amount of capital that I have mostly invested in equities.

This has been a choppy year for markets especially so if you are in Canada and have any amount of exposure to the TSX (oil and commodity prices, as well as people beating up on our financial sector due to a supposed impending real estate bubble) which have made it an especially bumpy ride.

Due to the nature of this year compared to the past several, and also due to the fact that my amount invested has grown to the point that market movement is now having a larger short term effect than my savings on a month to month basis.

Does anyone have any mental tips and tricks for dealing with this from people who have a lot more skin in the game? It can be discouraging to skip on the $15 lunch when you've lost 2-3k over the last few days for example - It almost feels irrelevant.

I try to think logically that even by MMM standards I'm still 15 years from FIRE and drops are actually a good thing, but it still hurts sometimes.

I'm thinking along the lines of only tracking market value changes every quarter? 


NorCal

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Re: How do you mentally deal with large market losses?
« Reply #1 on: July 25, 2015, 07:43:24 AM »
I go through the same thing, and everyone deals with it a little different.

What works for me is reminders to myself on the following lines:

1.  Your long term gains are largely driven by the price you buy at, as you will be selling when you plan to sell.  By being able to buy additional shares with new money at a lower price, you are improving your long term gains.

2.  The price the market tells you your shares are worth is entirely unrelated to their underlying value and cash generating potential. 

Or, I go back to this old Warren Buffet quote:



    “If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?

    Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?

    These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?

    Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

    –Warren Buffett, chairman’s letter, Berkshire Hathaway annual report, 1997

forummm

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Re: How do you mentally deal with large market losses?
« Reply #2 on: July 25, 2015, 08:05:36 AM »
When you're accumulating, you want stocks to go down. Then you are buying at a cheaper price. It means that your returns will be higher later--exactly what you want! Volatility is your friend when you're a saver.

FIRE47

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Re: How do you mentally deal with large market losses?
« Reply #3 on: July 25, 2015, 08:19:00 AM »
I

Or, I go back to this old Warren Buffet quote:



    “If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?

    Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?

    These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?

    Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

    –Warren Buffett, chairman’s letter, Berkshire Hathaway annual report, 1997

Brilliant

Credaholic

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Re: How do you mentally deal with large market losses?
« Reply #4 on: July 25, 2015, 08:23:47 AM »
Love all this advice, thank you!

lostamonkey

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Re: How do you mentally deal with large market losses?
« Reply #5 on: July 25, 2015, 08:31:43 AM »
You could also simply not look at your account balances other than when you are updating your spreadsheets/doing your taxes. Continue contributing to your accounts but disregard the total balance.

I also always remind myself that my investment timeline is the rest of my life (I plan to live on income generated by my investments post FIRE) so why should I care about short term fluctuations in the market.

choppingwood

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Re: How do you mentally deal with large market losses?
« Reply #6 on: July 25, 2015, 08:52:47 AM »
It is true that the down times will give you some inexpensive prices on investments.

Through a couple of major downturns, I have told myself that I had invested for the long-term, and that it made no sense to do anything but keep to the hold-em strategy. In the first downturn, I also beefed up my savings rate to at least partially compensate for what I was losing. It all came back both times and both times kept on going up. "Nerves of steel" is my mantra during these times. In the first downturn, I saw lots of people move out of investments, realizing their losses.

This last few months has hit me two ways -- in bonds and equities -- during what are my first couple of months out of work. You don't need much of your retirement money the day you retire (it will actually be May 2016 before I tap into it), so there is no panic.


ShoulderThingThatGoesUp

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Re: How do you mentally deal with large market losses?
« Reply #7 on: July 25, 2015, 09:36:02 AM »
Set it and forget it, then rebalance yearly.

mozar

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Re: How do you mentally deal with large market losses?
« Reply #8 on: July 25, 2015, 09:48:33 AM »
I was bummed out when my last $2k buying of stocks for my 401k happened when stocks were up, and then went down the next day. Your savings rate is most important. This recent downturn is nothing. Try watching it go down 700 points in one day.

lhamo

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Re: How do you mentally deal with large market losses?
« Reply #9 on: July 25, 2015, 10:14:16 AM »
For me, the psychology and practice has been exactly the opposite of what others often recommend.  I started tracking our net worth daily back in September 2008 when the financial world was going to hell in a handbasket.  I actually had TRIED to start tracking daily earlier in the year, as our net worth was hitting new highs, because I wanted to see when we hit 1mm. 

Anyway, when things started going downhill I felt myself getting anxious, but I knew that we were in the market for the long haul so I started the daily tracking thing because I was interested to see how the ups and downs of the market would actually play out in our finances.  For me, it has been great.  While it was hard to stomach those losses on the way down, we took Buffett's advice and made some strategic purchases and shifts throughout 2008-2010 -- putting large chunks of cash into kids college funds after particularly gruesome weeks of large market losses, and upping our retirement contributions to the max even as share prices were dropping. 

All of that paid off incredibly well for us financially, but the PSYCHOLOGICAL rewards have been even greater.  I now am not phased by large drops in the market or our net worth.  Because I have plenty of examples of our net worth dropping $20, 30, even 40k a month and then popping right back in the next few weeks or months.  So now for me when the market is tanking I actually get happy -- everything's on sale!  I actually get a bit frustrated when the market goes up just before the 15th or the end of the month, because that means we are buying shares in our retirement accounts at inflated prices.  I want to buy those babies at the lowest possible cost!  More profit for us when we eventually start cashing out, which most likely won't be until at least 2028 (when DH will start having to take required minimum distributions) as once we sell our Beijing apartment we will have an excess of non-tax deferred money to tap into.   

Maybe my psychology is wierd, but just an n=1 anecdotal example of a different strategy that has actually helped me get to the point of internalizing Buffett's core advice -- the time to be afraid (sell) is when everyone else is greedy (buying), and the time to be greedy (buy) is when everyone else is afraid (selling).

Frankies Girl

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Re: How do you mentally deal with large market losses?
« Reply #10 on: July 25, 2015, 10:21:05 AM »
I know that for someone just starting out, 2K or even 5K seems like a whole lot of money. But it isn't "large amounts," (I lost over $18K in the last week or so, and that's nothing compared to some of my losses last October) and one of the things to internalizing in investing is that the market having a down day (week/month/year) is not a true loss unless you sell the stock/mutual fund and lock in the loss. So first thing, it's all just numbers on a screen until you cash them in.

Second thing: Like everyone else has said, if you're still actively investing and growing your portfolio, then you want the market on sale - lower prices = bargains.


And even if you're in FIRE mode and drawing off your portfolio, you still won't be pulling the entire amount out, so losing ten, or even one hundred thousand isn't the end of the world. You adjust your withdrawal to come from investments that are doing well (like how bonds typically do well during market downturns, so sell off some of those to get your living expenses) or else count on savings or CD ladders to allow your main investment portfolio to recover, and aren't selling off stocks when they are at their lowest level.

I also started tracking our net worth and portfolio daily, and it really helped to desensitize me to the crazy swings, and I can take advantage of any small drops if I have some money to invest right then. So very much like lhamo's experience here.

And one of the things that helped me psychologically was to do the math on what a 10% (correction level) and 20% drop (market crash level) would look like in my portfolio. Seeing the numbers and doing the subtraction sure sucked, but at least I got a feel for how hard it would hit my portfolio and could mentally prepare myself for those events. And I know I'll be okay when it happens, and it WILL happen - many times during my lifetime even - so might as well get adjusted to the idea.




ambimammular

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Re: How do you mentally deal with large market losses?
« Reply #11 on: July 25, 2015, 01:00:00 PM »
Focus on the number of shares you have; they can only go down if you sell. Lately I've been begrudging my monthly purchases. With prices so high I can't get nearly the number of shares I used to.

KMMK

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Re: How do you mentally deal with large market losses?
« Reply #12 on: July 25, 2015, 02:07:13 PM »
There is no loss unless I sell, and I don't sell. So there's nothing mentally to deal with.

ender

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Re: How do you mentally deal with large market losses?
« Reply #13 on: July 25, 2015, 02:31:03 PM »
I've thought about this recently after dropping $2k into my 401k and seeing our net worth go down.

An interesting way to think about this is to think about, "what is the total amount I am saving this year?" and then "how much would the market have to go down in a year to overcome that?"

If you are just starting out, even $200k investments can drop by 10% over a year can still result in a higher net worth after the year. A 10% drop is $20k in losses, so if you save more than $20k then you still progress upward (only a yearly basis).

It gets harder the more you have, though :)

ynotme

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Re: How do you mentally deal with large market losses?
« Reply #14 on: July 25, 2015, 03:33:37 PM »
I agree that tracking the markets daily gets you used to volatility and the fact that it is always going up and down.

However there was a time for a year or so when I only checked my investments and updated values at the end of each month. This provided me with a view on overall market direction as I compared month on month and also allowed me to set and forget without it being on my mind every day. I'd like to get back to that. At the moment I check prices most days but only update prices weekly so the daily movements aren't reflected in my net worth.

okits

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Re: How do you mentally deal with large market losses?
« Reply #15 on: July 25, 2015, 04:52:05 PM »
Fear is an emotion, and I am mostly a rational person, so I apply logic.  My investment horizon is long and the general direction is up, so I steel myself and buy more/rebalance.  I think successful index investing is simple but not easy.  You reap the rewards by tackling the not-easy (emotional) part.

forummm

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Re: How do you mentally deal with large market losses?
« Reply #16 on: July 25, 2015, 05:09:08 PM »
Just don't pay attention to the market swings. It just goes up and down somewhat randomly from day to day. Over the long run it will go way, way up. The long run is your time horizon. Technically your house has a value that changes too. But just because someone offers to buy it from you for $20 one day doesn't mean you need to panic and sell before it drops to $10. That would be stupid.

I've lost more in a day on occasion than I make in 3 months of working. Other days I made that much. It's all random noise. Don't think about it.

hodedofome

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Re: How do you mentally deal with large market losses?
« Reply #17 on: July 25, 2015, 07:49:20 PM »
Do you have an investment plan? Make a plan, stick to the plan. Discipline allows you to do things when you don't feel like it.


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