When the Stock Market Makes No Sense
Investing can be weird. The market doesn't seem to make logical sense. The more due diligence that is done doesn't seem to help. Sometimes it's hard to remember that the stock market is not the economy. Logically, you'd think: "High unemployment, the economy basically shut down, little-to-no travel - the market should be going down..."
I personally know people (not clients) that have done a few different things with their money throughout 2020. Here are a few examples:
#1: Shorted the market at the perfect time, but thought it would go lower.
In one of the trading group chats I'm in, there is a person that bought put options (in the simplest form, he bet that the market would go lower in the short-term). He started with about $50,000. He kept doubling down and ended up with $5.5 million in late March (not kidding). You're probably thinking, "Why wouldn't he 'just' stop?" It's the same reason as lottery winners go broke. They got lucky. There is a psychological difference between money that is earned vs. won.
Where is he now? Since late March, the market has gone up quickly. Remember, he was still betting that it would go down. His $5.5 million turned into about $800,000. Still ridiculously good since he started with about $50,000. But still - what was the goal? Investing with no goal in hopes that you hit a lotto ticket is absurd. Still think you can time the market consistently? The first win is free. Try to do it in the long run.
This person is still frustrated and mad because the market makes no logical sense to him. It may make no sense, but it definitely cost him a considerable amount of money to learn that lesson (depending on how you look at it).
#2: Moved to cash and is still there.
Panic is not a strategy - especially when it comes to investing. Some people use what we call "stop-loss" orders. As the name suggests, the order triggers at a certain price or percentage that the investor sets in advance to stop the losses in their accounts. Sounds great, right? The investor attempts to limit the amount of losses their account takes during down markets.
So how did that play out this time? This person set stop-loss orders to sell everything in their portfolio if there was a 10% decline. Obviously those orders triggered. They were happy that they wouldn't experience further losses. Problem number 1: volatility. Earlier this year, there were double-digit positive days as well as double-digit negative days. The 10% stop-loss order could get entered and then triggered the next day. Problem number 2: they had no plan for re-entry. Yes, they missed some of the downturn. However, the S&P 500 is up almost 30% since March 23rd (the current bottom). They missed that too.
Again, what was the goal? Here is a question to think about when investing: what would hurt worse? A 20% short-term loss OR missing out on a potential 20% gain?
This person is now waiting for "the best time" to get back into the market. Since it makes no logical sense to them how the market has been going up, they'll be sitting on the sidelines for a while.
Investing is different than other activities, hobbies, etc.
Think about sports - if you've been watching "The Last Dance" (the documentary about Michael Jordan), one thing that sticks out is his work ethic. Imagine going to the gym and putting up 500 shots per day for a year. At the end of that year, you'd most likely show some improvement with shooting. The same isn't guaranteed in investing - you can put in hours per day learning about the market, different companies, etc. That doesn't mean that the market will do what you think it will do. It cannot be timed and sometimes it makes no sense. Create goals, keep emotion out of it.