😱 How fear makes us better investors

Hey hey, happy Monday!

Exactly one week ago, we experienced one of the sharpest panic-induced stock market selloffs in years. I want to talk to you about emotions, and how a surge in fear is often a time to buy more stocks.

If you want my rapid-fire thoughts on the selloff, check out what I said to Axios and the Washington Post. I was also on CNBC Tuesday morning to talk about the drop from the floor of the New York Stock Exchange.

Have friends stressing about markets and the economy? Send ‘em my way 😊

Sometimes, you wake up knowing that a tough day lies ahead.

For Wall Street, that was Monday.

The Japanese stock market dropped the most in 40 years on the breakdown of a popular institutional maneuver known as a carry trade. This triggered a panic that quickly spread to the US in the early morning hours.

The S&P 500 dropped 3% on the day – its biggest loss in nearly two years. The VIX – an options-based gauge of market fear – reached its highest point since the depths of COVID shutdowns. The social media take machine went haywire.

It was one of the most emotionally charged trading days in recent history.

Monday was a tough day to logic yourself through. And when logic fails, emotions often take over.

But I have good news.

In investing, fear often works in our favor.

I woke up in a mood Monday morning.

I was up at 4 am to catch a last-minute flight after having three flights canceled within 24 hours. I checked the forecast for Hurricane Debby, which threatened to bring a historic amount of rain to Charlotte on the day I was scheduled to return home.

Then I opened Twitter, and the panic set in.

I spent the day running to meetings around the city while trying to make sense of the chaos.

From what I saw, it was a tangled web of unfortunate events. Beyond Japan, people were agonizing over Warren Buffett selling part of his Apple position, the state of the job market, and big tech’s lofty profit expectations. For most of the day, I was a mess of back sweat, melted makeup and incomplete thoughts. 

I’m usually pretty good about keeping my cool well when stocks are falling. Heck, that’s what I do for a living – provide cool-headed analysis when hotter heads are prevailing. But even I started to crack under the weight of all that happened.

It was a challenging day for all types of investors. Brokerages seized up for hours from the surge in trading volume. Pessimism surged among everyday investors at the fastest pace since late 2022, when we were in the throes of an inflation crisis.

You can see the change in negative sentiment in the grey bars below:

Fear was rampant, and at the end of the day, people were fully prepared for the world to fall apart.

Then, a strange thing happened.

Japan recovered, Apple rebounded, and we got a few hints that the economy isn’t in shambles. At the end of the week, Monday’s selloff had been almost erased. The S&P 500 started the week at 5,347 and ended at 5,344.

Fear can be counterintuitive when it comes to investing. When the world feels uneasy, people feel less inclined to take risks. They sell their stocks, crawl back into bed and pull the covers over their heads. Bailing seems like the sensible thing to do when emotions are running hot.

But often, fear is a signal to do the opposite. When we panic, we lower our expectations so far that any news short of disaster feels like rain in the desert.

Then, people pile back in. It’s a phenomenon Wall Street calls a “relief rally” – or when stocks rise solely because bad news isn’t as bad as people think.

Think of it this way. What would you do if you knew you were about to get punched in the stomach? You’d tense your stomach up and brace for impact. And that punch probably wouldn’t hurt as much as you think. You’d heave a sigh of relief and walk away.

Markets work in a similar way. When lots of investors brace for a punch – or sell their stocks – they tend to discover that the actual punch doesn’t hurt as bad.

These relief rallies can be expensive to miss, too. If you sold after every big down day – let’s say a 2% drop – in the S&P 500 and bought in two weeks later when the coast is clear, you would’ve missed out on a third of gains over the past 20 years. And throughout history, the best and worst days for stocks have happened in clusters of panic and relief.

Monday felt awful. We all felt defeated crawling into bed that night. But we made it through with higher portfolio values – and an important lesson on how to be Jedi masters of our emotions on panicky days.

Still, we are humans, not robots. We will never be devoid of emotions, but we have to stay strong in the face of fear to be successful investors. Your portfolio’s success depends on your behavior during the wild panics.

Instead of trying to remove all emotion from your decision-making, focus on things you can control. Make a plan and stick to it.

And above all, remember this: you – and your portfolio – are more resilient than you think.

Thanks for reading!

Callie

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