Fear is always in the air, but there are occasionally epic outbreaks of this emotion when it comes to financial markets.
In practically all economic matters, we intuitively understand that when price goes down value goes up. That’s true in the grocery store, at your favorite clothing retailer, and on the lots of auto dealerships. When the price goes down our interest goes up.
But there’s one exception to this: Investing.
In this one area – investing – when prices drop, some faction of investors are convinced it’s game over and prices will never recover. And that irrational belief forms the genesis of their susceptibility to a disease that I call Acute Money-Loss Distress, or AMLD for short.
This condition afflicts at least 90% of the investing public at some point on their investing journey and robs them of wealth they otherwise would have enjoyed. And if that sentence isn’t true, it’s because the percentage is actually higher.
This is a profound problem.
We all must know about Acute Money-Loss Distress and how to avoid it or at least protect ourselves from its harmful effects to our wealth. This disease can remain undetected decades before its symptoms flare up and cause real financial devastation.
When the disease takes hold, no portfolio is safe, and wealth is almost assuredly about to be destroyed.
An AMLD infection produces a consistent, though irrational, behavior, which is to sell, not buy or hold, stocks as they decline. And when the sell order is executed, that’s the moment real financial damage is done. Those rattled investors – in that fear-driven decision – irreparably reduce their wealth.
And based on my experience, investors become more susceptible to AMLD as they age.
Once people are within 10 years of retiring, they start believing in a big lie, perhaps the biggest lie in investing. What is it? Simply put, that they can no longer afford to lose money because they don’t have time to earn it back.
It’s totally bogus.
Let me be clear: Investors nearing – and even in – retirement can indeed afford to have their account value decline when the stock market drops. Not only that, they should be able to withstand even significant declines. And they can do it without impairing their ability to successfully retire and without running out of money.
It’s true. Acute Money-Loss Distress tricks investors’ minds into thinking market losses are permanent losses. Nothing could be further from the truth, but the disease warps their minds.
If these AMLD-infected investors are being honest, they would tell you that what truly bothers them is their account balance. They hate seeing it going down.
Again, not because it’s financially devastating from any practical standpoint, but solely because they like the comfort that a bigger account balance provides. The sheer panic that people experience when seeing large sums of money seemingly vanish like a Houdini magic show produces an intense desire to make the pain go away.
It's human. But it doesn’t have to be that way.
Unfortunately, there’s no pill to swallow that will inoculate you from AMLD’s harmful effects.
The only solution is to find someone you trust – a friend, advisor, or relative, who has seen this disease work its toxic ways, who can detect its early onset symptoms, and who can talk you out of damaging your wealth by selling or changing your portfolio as the disease takes hold.
Keep in mind, Acute Money-Loss Distress always subsides on its own. But for some, the disease’s damage is already done before it does.
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