After a strong start in 2024, the S&P 500 has lost 5.7% over the last few trading sessions.
This decline stems from the index’s extreme concentration in a few tech giants that surged to alarming valuations due to the AI buzz, leading to a sharp drawdown as investor enthusiasm wanes. More concerning is the Fed’s delay in cutting interest rates and the rising probability of a recession, especially with the unemployment rate climbing to 4.3% in July. The Sahm Rule has been triggered, and each of the last 11 Sahm triggers has coincided with a recession…
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Alright, I’m going to stop you right there before you go into a panic attack.
As you were reading that chunk of paragraph above, if you’ve noticed your heart pumping faster, your focus sharpening, and a wave of regret take over on why you didn’t sell while the times were good…
I want you to take out your journal or a piece of paper and start writing these feelings down.
Because your amygdala (the central portion of our brain) has just been hijacked by me because I just fed you a bunch of “intelligent” sounding reasons why there’s a huge threat in the stock market that’s going to hurt you.
Our amygdala processes draw downs the same way we perceive a threat from an approaching lion—it heightens our senses and makes us want to run.
This is the primary reason many investors struggle in the stock market: it’s a behavioral challenge. We’re constantly bombarded by fearmongers and superficial analyses. The media and content creators know this, and they exploit us by feeding our fears to capture our attention.
Let’s face it: Pessimists Sound Smart, but Optimists Make Money
I’m going to be straight with you here, there’ll always be a reason to sell. And if history is any good indicator, it’s always a mistake to interrupt the compounding process.
The stock market is a massive wealth creator, but only if you give it time. If you’re in the accumulation phase, be glad when Mr. Market offers you lower prices. Every decline is a wealth transfer from short-term traders to long-term owners.
Sow the seeds today so you can enjoy the shade tomorrow.
If this week’s market decline has you worried, it’s likely because you:
- You’re new to investing and need to build a solid foundation.
- You don’t fully understand the risks of your investments.
- Your portfolio isn’t diversified enough.
- You’re investing money you can’t afford to lose.
As Adam Smith wisely said, “If you don’t know who you are, the stock market is an expensive place to find out.”
To protect yourself from impulsive decisions, build a solid foundation with these four key pillars:
- Maintain emergency funds of 6-12 months.
- Never invest using borrowed money.
- Block out news and creators who prey on your fears.
- Keep a diversified portfolio.
I hope this article helps you understand yourself better and become a more resilient investor.
Let’s compound steadily together,
Thomas