Experts discuss market psychology

A worried investor.

TEXT OF STORY

Tess Vigeland:


Jason Zweig: Great to be with you, Tess.

Vigeland: And Richard Peterson is a managing director of Marketpsych Capital and is also a board certified psychiatrist. Welcome to the program again.

Richard Peterson: Thank you, Tess.

Vigeland: So gentlemen, the mantra of, you know, all personal finance and investing is buy and hold. And ever since this financial crisis began, on this very show we've been saying, unless you're about to retire, keep with your strategy -- don't lock in your losses, things will eventually get better. And in fact, just this week President Barack Obama himself has this to say:

Barack Obama: It bobs up and down day to day. And if you spend all your time worrying about that, then you're probably going to get the long-term strategy wrong.

Vigeland: So there you go. But, here we are. The Dow has lost more than 50 percent from its high; we're not below 7,000, heading perhaps for six, perhaps for five. Why on earth, and Jason, let me start with you, should anyone continue to hang on?

Zweig: Well, I guess there's a couple things to think about, Tess. The first is with 20-20 hindsight, which we all have, but aren't able to use when it would actually do us any good, everyone should have sold all of their stocks in October of 2007. And then we wouldn't be having this conversation. One of my columns this week was on baby steps. You know, I think taking a small action will make you feel so much better. I know of one radio host who claims to have left her basic allocation alone--

Vigeland: OK, it's me.

Zweig: But changed her future contributions. And that's a very effective way to make yourself feel a little better for the time being until things settle down.

Vigeland: Richard, you know, let me ask you, at a certain point people see these benchmarks and they think -- if I don't get out now, then I'm going to keep having even more to make up for in the long run.

Peterson: Tess, absolutely. I -- my sense of it is that everyone needs to have their own financial stress management plan. When you invest, you've got to say to yourself, I'm willing to accept this amount of losses or this deterioration in fundamentals.

Vigeland: But how do you know what that level is for you?

Peterson: Well, it depends on what, why you got into it in the first place. And one thing that's concerned me about the market these days is I think that there's something of a stock-ownership bubble. There's a lot of people who've bought stocks without really understanding why they've bought stocks. They just were told, it goes up ten, 12 percent a year, it's the best way to beat inflation. It's very important that when people invest, they understand why they're investing. If they're investing for price appreciation, they should also have a pain threshold and say, if it drops this much from this point, I can't take it anymore.

Zweig: Yeah. Tess, I mean, I would jump in and add to what Richard is saying, that one of the things that people really did not understand about stocks, until we entered this bear market, is there's a reason this longrun return on stocks is higher than anything else. It's because stocks are riskier than anything else. It means that the collapse in stock prices is nature's way readjusting the stock market to the point at which it becomes almost assured of generating a higher return in the future, but only for the people who still own them.

Peterson: And it might stay that way. You know, it might stay down at great values for a while, even a decade.

Zweig: I totally agree with what Richard is saying, Tess. And I think I would add a second idea, which is we'd all be better off if we stopped talking about the stock market as, as the stock. market.

Vigeland: What would we call it?

Zweig: We should call it "American business." Then the question becomes, do you want to have no stake in the American economy? The answer may be yes, but I kind of doubt it. The notion that's becoming increasingly common that the stock market is a kind of idiot's game that only fools would play because you're guaranteed to lose, is ridiculous to anyone unless you believe that the American economy is going the way of the dodo.

Vigeland: I guess, you know, that again gets back to something that we've talked about on this program before, which is the definition of the long term and whether that has changed in any significant way. Because again, as I was kind of asking before, as you watch the markets collapse, the farther down they go, the more you have to make up in that long term. So if you get out now, if the markets keep going down, well, you've made a good bet. If you had gotten out, you know, last fall, you would've been better off than right now.

Peterson: Right. Since September, I guess, the markets have dropped about 45 percent. You'd have to make back about 76 percent to get back that.

Vigeland: Right. So the longer you wait to lock in your losses, the worse off you are. But again, I suppose that depends on what the long term is.

Zweig: That's mostly true, Tess, but I would modify it slightly. The longer you wait to get out if the market continues to go down, the worse off you are. But this converse is true once the market recovers, namely the longer you wait to get back in, the worse off you are.

Peterson: You know the one thing that, Tess, that Jason and I are both well versed in the mental mistakes that investors are making. When markets are dropped steeply, people tend to base their long-term forecasts on what just happened. But the truth of it is, that's a mental phenomenon that happens because of the chemicals that we release in our bodies when we're under stress and in fact, if you take a step back and were only to check in the market once a year, it wouldn't get you that riled up and you wouldn't -- you would be able to look at this as a real buying opportunity. But I think because so many people were already owning stocks and were feeling so beaten down, they're less willing to take risk now then they were, say, a year and a half ago. So, what people who are investors really need to do if they want to get back into the stock market is actually balance the emotion with emotion -- not necessarily with the intellectual approaches like looking at stock screeners, looking at price earnings ratios. But in fact, it's really important to blow a little steam off, as we did mention, but also to counter balance some of that fear and risk-aversion with an appreciation of what you do have in your life. And what I think a lot of people are trying to get out of investing is a sense of security. So it's really important to retune into what does give you a sense of security. Where is your support network? And that really addresses the emotions that, right now, are making us think short term. It really decompresses those a bit by remembering, you know, what's really true and valuable in your life.

Vigeland: Richard Peterson, Jason Zweig, thanks so much for joining us today.

Peterson: Thank you, Tess.

Zweig: Thank you, Tess.

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