Current Market Conditions Encourage Bad Decisions – Don’t Make The Same Mistakes

My job has good and bad periods, and when the markets are up, everyone loves me and I hear nothing but good things. But at the same time, as soon as the markets begin to show some weakness, my phone is ringing constantly with worried investors. While you can occasionally talk some sense into certain people, others just go off and make irrational decisions.

First Negative Return on a Quarterly Statement

For most types of accounts, quarterly or annual statements are coming out, or have just recently come out. For the past few years, this usually brings excitement as investors can smile about how much their account grew. Unfortunately, for many people the fourth quarter of 2007 brought with it the first overall negative return in years. The S&P 500 closed out the last quarter with a little over a 3% loss, so those who had most of their investments in domestic stocks saw a hit. In fact, even those with some bond holdings probably also a decline.

This really just goes to show you how short-term people generally think when it comes to investing. If we look at the S&P over the past five years, or 20 calendar quarters, only five quarters saw a loss. And even then, the losses were quite small, generally ranging from around -1.5% to -3.3% . Considering most people have a fairly diversified portfolio with some bonds, small cap and international stocks, the typical person didn’t see 5 losing quarters over this period.

But instead of people remembering how they have made excellent returns over the past five years, they begin to overreact as soon as a negative number pops up on their statement. Forget about that 11% annualized return they’ve realized over that period, but instead they focus on the couple percentage points they lost in the last three months.

I’ve Seen Some Drastic Measures Taken

This market has driven some wild behavior. In just the past few weeks I’ve seen people do everything from going into 100% bonds at age 25, to those who recently retired completely cashing out their entire retirement account balance. It is truly amazing how certain people react, and no matter how much you try to rationalize with them, they insist that what they are doing is in their best interest.

Don’t Make Drastic Decisions Based on Short-Term Market Conditions

Remember when you proudly did your research and developed a decent asset allocation? You did that asset allocation specifically to address times like these. By diversifying your investments, you intend to maximize your return while minimizing risk. That doesn’t mean that you’ll always see a positive return and it doesn’t mean that you’ll always meet or exceed what the market does. Unfortunately, a lot of people think that by adding some bonds or cash to their portfolio that it will protect it enough from loss. While they can help offset market losses, the long-term benefits of fixed investments aren’t always noticed on quarterly statements.

It is perfectly reasonable to take a look at your portfolio and determine if there are any minor adjustments to be made, but if you’re already in a suitable allocation, you shouldn’t make any major changes. The last thing you want to do is move from an 80/20 equity/bond mix to a 20/80 mix just because the market is shaky right now. All you’re doing is locking in the short-term losses you’ve experienced and trying to time the market by hoping that the market keeps going down. It has been written about numerous times, but for most people, market timing simply doesn’t work.

So, don’t make any drastic decisions based on the past few weeks and instead, think back to what you’ve seen over the past few years. Is your 5% loss in the past month really that bad considering you made 50-60% over the past 5 years? Just keep in mind that you can’t always expect to see 8-11% returns each year, and that is why they are called averages. Sometimes you’re up, sometimes you’re down, but we know from history that if you’re in long enough, you’ll be up.

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Filed Under: Investing

About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.

15 comments
tmo263
tmo263

Describe how current credit market conditions affect your planning or operating decision for your good or service.

Writer's Coin
Writer's Coin

Way to keep a cool head. I'm with you on this one. Drastic decisions, in my opinion, include investing the whole Roth contribution for 2008 this early. I just don't know what it would force me to do if I bought all-in now and the market continued downward. It might encourage further silly decisions.

David
David

Pretty good buying opportunity right now. It would seem that the US stock market must continue to go up long term if only because the dollar will continue to devalue.

Money Blue Book
Money Blue Book

It's important not to trade on emotions alone...it never pays to panic and invest. Invest for the long haul and it should pay off (long haul= more than a year).
-Raymond

oxymoron
oxymoron

slow and steady wins the race. but 100% bonds at 25? what gives? Lazy Man is 100% correct in his post.

Jeremie B
Jeremie B

Jeremy,

I am guessing that most of your clients are a little older correct or are 35-40 year olds calling you too? I know it's difficult watching these market fluctuations, but overall, isn't a great time to buy over the next year. Purchasing on highs isn't always the best idea.

I think reoccurring investments (monthly contributions) would be such a long-term success plan. Are you still recommending mutual funds versus companies that are still trucking along like KO, MO and UN?

cytoman
cytoman

Normally I would dollar cost average. Due to the current market conditions I'm considering investing the maximum annual Roth IRA contributions for my wife and I. The only thing holding me back is wondering if it will go lower. I started investing in 1998 and saw fantastic gains until early 2000. I didn’t sell but I was "in the hole" for several years before I recovered. From that point I decided never to judge my selling urges by the market. Now I consider these market down turns as a buying opportunity. My asset allocation and the years until my retirement determine what and when I sell.

Real Estate Guy
Real Estate Guy

This shows how impatient people are and how easy it is for market players to play with their minds to their benefit.

KMC
KMC

People are often their own worst enemy when it comes to things like this. As you say, if something's a good idea today, it will be a good idea tomorrow. Sleep on it before making major moves, I say.

balootisme
balootisme

thanks genxfinance for this lovely...

its was the life of business because of up and down..

Jeremy
Jeremy

Right, it is normal to feel a little disappointed when you lose money, but that just shouldn't be a basis for doing something extreme.

I'm not too thrilled with my recent performance, but like Webomatica said, since most people are doing systematic contributions, this just means you're picking up some shares at a discount. They will go up once again.

Frugal pursuit
Frugal pursuit

I have not seen all my statements but loss of 6% sounds good to me. My first retirement investments began in 1999 and by 2001 had lost half their value. I would take a 10% lost over 50% any day. Now I try to look at a down market and loss in my portfolio as an indicator that stocks are starting to go on sale. I will admit that seeing my Roth IRA barely holding onto value is disappointing, but post-tax money changes affect me more than pretax.

Lazy Man and Money
Lazy Man and Money

People HATE losing money. If they lose a dollar to fees or just bad market performance, be prepared to feel the wrath. However, if they get $10 due to a bank error or something else, they'll be very quite about it and continue about their day.

Colgate toothpaste has a toll-free number to leave comments. How many people do think you call to say, "Hey, my teeth feel really clean today. I just want to thank you for a great job." Zero - people don't have the time or motivation for that. However, complaining makes them feel better - gives them catharsis.

There are some things you just can't change.

Webomatica
Webomatica

Things I try to remember - since many readers here are "gen x" meaning in our thirties - we still have decades to go until retirement at 67. Second, dollar cost averageing means putting money in when the market is low as well as high. Actually, in a sense one could think the market downturns today are good because we still have thirty years to realize the gains.

Lily
Lily

I'm not afraid to admit that I cried for about 10 minutes when I did my December net worth review and found that for 2007, the ending balances in my 401(k), IRA, and brokerage accounts were all lower than the total amount of money I put into each. Yes, I cried. Tears.

Fortunately, I've read enough about personal finance to leave it at that. I took a look at my investments, found them still fundamentally sound, and didn't change a thing.

I guess my point is that it's natural to feel afraid or angry or unhappy with the market when it doesn't continually go up. It's fine to have those emotions and to let them out. As much as we say "keep your cool in a downturn," it's very, very hard to do so.

I advocate crying if you need to, or punching a pillow, or eating a tub of ice cream while watching Notting Hill for the twentieth time. But at the end of the day, stay away from your computer; don't call your broker; really forget about the market and don't let it drive your investment decisions.

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