By Brad Brain
I spent a lot of money last week, and I feel pretty happy about it.
This past week was Black Friday, and I took full advantage. Bought all my Christmas presents. Booked some flights and hotel rooms. Updated some cell phone contracts. It was an expensive week.
So why am I happy?
I am happy because I was going to do all these things anyway, and by taking advantage of Black Friday pricing, I was able to do all of these things when they were on sale.
Sure, last week cost me a lot of money. But it would have cost me much more if I had waited until the prices returned to normal before I did my shopping.
Here is my point. What is intuitively obvious when it comes to retail purchases (buying things when they are on sale is good) can be scary and bewildering when it comes to investment purchases. From time to time, prices will come down for both investments and airline tickets, but far fewer people will be excited for the opportunity to buy their investments on sale.
There are two reasons why this is so.
The first reason why people think about Black Friday differently than they do bear markets is the narrative around the two scenarios.
Think of what you see in the media when the topic is Black Friday. Stories of bargains, and people clamoring to get in on the good deals. Stories of how good the drop in price is.
Now think of what you see in the media when the topic is a bear market. Stories of how uncertain the future is, and people fleeing from the markets. Stories of how bad the drop in price is.
It’s natural for people to be influenced by the stories that they are bombarded with. If the media is telling you how bad things are, you are likely to be persuaded by that narrative.
The second, and biggest, reason why people think about Black Friday differently than they do bear markets is that most people make money decisions based not on fact, but on emotion.
When an investment goes up, many people fear that they are missing out and so they will want to buy. Logically, this doesn’t make sense. Why would you wait until after something goes up in price to buy it?
When an investment goes down, and many people fear it will keep going down, so they will want to sell. Logically, this doesn’t make sense. Why would you wait until after something goes down in price to sell it?
Make no mistake, the evidence is overwhelming that this is exactly what the majority of people will do. The key to understanding this phenomenon is to understand that logic has nothing to do with this specific decision-making process. When it comes to money decisions, the majority of people are driven by fear and greed.
Why do people buy investments after they have gone up? Greed.
Why do people sell investments after they have gone down? Fear.
People understand the phrase “buy low, sell high”. But they don’t behave that way. As I say, the evidence is overwhelming. Money will pour into high-flying investments, and it will evaporate from investments that are struggling.
But, believe it or not, if you are a long-term investor, with an appropriate tolerance for variable returns and you own high quality investments, you actually want to see investments go on sale from time to time.
So you can buy more.
Think about it. Let’s say there is a wonderful business, run by honest and competent management, in an industry with a bright future. This business is profitable, and very competitive. It is here to stay.
Let’s say that the shares of this business are trading were trading at $100 last month. But today you can buy them at $80. Does that make you sad? It shouldn’t. If you liked the stock at $100, you should love it at $80.
Yes, you read that right. Assuming that it is appropriate for your situation, you want to buy, not sell, the next time that investments go on sale. Despite the media’s narrative about the uncertain future. Despite whatever value your portfolio used to be.
Now, of course, there are all sorts of “what ifs”. What if it is a lousy investment to begin with? What if you need to sell for estate planning purposes? What if you are drowning in debt? Be sure to talk to a professional financial planner about your own unique situation.
But the mindset for bear markets is, it’s Black Friday. Things are on sale.
Brad Brain. CFP, R.F.P., CIM, TEP is a Certified Financial Planner in Fort St John, BC. This material is prepared for general circulation and may not reflect your individual financial circumstances. Brad can be reached at www.bradbrainfinancial.com.