Rule #1 Finance Blog

With Investor Phil Town

How Fear Impacts the Stock Market

When your retirement savings are on the line, if you’re just starting out, or if you’ve been investing for a long time… you can be seriously impacted by stock market fear when making investment choices.

It’s a fact of life that people are emotional. And for good reason, they want to protect their nest egg.

But…

Emotional people don’t make the best investors. So, we need to figure out how to not let fear impact our investing.

As Warren Buffett said, “If you cannot control your emotions, you cannot control your money.”

Why is that? Because the market can make you CRAZY! That’s why.

If you were to react to the market and all the fear everyone has when it drops, you’d end up with less than you started, every time. The stock market can up or down and isn’t a rational place all of the time because of fear!

The following are market scenarios that trigger the most fear in investors and what you can do as a Rule #1 investor to take advantage of the situation.



1. Pulling Money Out in Short Term Market Dips

People close to retirement are more sensitive to short-term dips in the market than those who have the time available to wait on the market to recover. There are 75 million baby boomers in the US and 50 million of them have money in the stock market.

If they all pull their money out because they fear big losses before they retire that they can’t recoup, then we see a big dip in the market.

2. Market Shifts to “Safer” Investments

When fear overtakes the market and stock prices begin to drop, many investors will shift their money into “safer” investments such as gold, and silver. This means that, in many cases, gold and silver tend to go up at times when the market is going down.

We call gold and silver, “Fear Trades.”

Leave that sort of investing to the professionals. Be aware of the presence of these commodities, but don’t get caught up in buying them when the market dips. Be ready to buy wonderful companies when the market drops. Don’t jump into fear trades.

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3. Fear Has a Domino Effect on the Market

Fear in the stock market is almost always a precursor to a bear market at best and a recession at worst. Fear tends to have a domino effect on the market.

As more and more people exit the market, it can create a chain reaction that drives the market down to extremely low valuations.

How to Use Stock Market Fear to Your Advantage

For those who are able to keep a level head and have time to wait on the market to recover again – as it always does – this can be a time of extraordinary opportunity.

At the beginning of a major decline, there are usually concrete reasons why people are concerned and stock prices are dropping. Before long, though, fear itself becomes the primary factor that drives the market down.

This means that the price of many great companies will be dramatically lowered for no other reason than the fact that people are afraid.

If you can push past your own fear and buy at a time when other people are selling, you can pick up a lot of great companies at rock-bottom prices.

With that said, it’s still essential to invest your money in the right companies even at a time when lots of companies in the market are on sale relative to their value. Not all companies are able to survive a recession.

During a recession, be sure to only invest in strong, proven companies that you understand, that have the funds, a reliable business model, and management in place to survive the downturn and come out stronger than ever once the market begins to recover.

Do you think we’re headed for a crash? This Stock Market Crash Survival Guide will help you prepare for the next market crash and help you cash in when the market drops!