My friend Jim Rohrbach sent me an article he recently authored:
I talk to a lot of people about investing. Many of them are afraid to invest. I don’t think they recognize their fears, but the longer they talk the more I recognize the fears that are not obvious to them. I had a few of those conversations this week. One was from an existing subscriber and one was from a potential subscriber who has called me on several occasions. At the end on each of the calls from the potential subscriber he tells me that he understands the importance of my service, and that he is going to subscribe. But, he never does. The other conversation is with a current subscriber who did not get in the market even though he knows that the RIX has been on Buy Signals for almost all of the time since the March 9 lows.
What are the common threads in these conversations? Well the same ideas apply to most investors who can’t pull the trigger on up trends and down trends. When the markets hit their lows in early March, all we heard was that the markets were going much lower and we were going into a depression like the one that happened in the 1930’s. So that creates the fear that “if I get in now the market will go down, so I will wait so I don’t lose money”. It doesn’t matter to these people that the trend of the market turns up. They are afraid of losing money, so they stay on the sidelines.
Another fear happens when the trend of the market starts down. Many investor want to keep their recent profits. They are sure that the markets will go back to their recent highs so they stay too long because they are convinced that “if I sell now the market will turn around and go back up”. So they stay and stay until their losses get so big that they make the decision to ride it out. In bear markets, fortunes are lost waiting for the market to go back up.
Another fear occurs when the market continues up. Those who did not get in are afraid to get in because they are sure that if they get in, the market will turn down and they will lose money. So they wait for a pullback, that may not come. If the big pullback does come, these same people will become afraid again and will not get in even though they are given a second chance. Fear controls their decisions, so they can’t make a move. They eventually join the “Buy and Hold Crowd” and ride out all market up and down moves. They become “Sitting Bulls”.
If investors base their investment decisions on emotions and fears, they will probably be unsuccessful. When investors decide in advance where they think the market, or their investment vehicle, is going to go they will tend to look for indicators to support that decision. They have a strong need to be correct even while their financial world is collapsing.