Surviving the Stock Market Chaos

Herd mentality | BCBusiness
In chaotic market times, the herd mentality often leads to panic, quickly abandoning any intelligent investing principles.

This blog – from The Insider’s alter ego, The Cheap Guy – looks at the stock market chaos that followed last week’s debt stalemate in the U.S. government. And then he cries into his (cheap) beer.

Apparently the world’s investors have reacted to the U.S. debt problem by abandoning stocks and running – straight to U.S. debt.

That’s the crazy result of market tumbles this week. Investors dumped stocks that generally are doing well, and ran to the “safety” of U.S. treasury bonds that are paying near zero interest.

This makes absolutely no sense, but then investing rarely does. More often, it’s about herd sensitivity and raw emotion instead of logic. Investors who rely on instinct and little else are sensitive to every little danger, and often abandon all sense when they sniff even an inkling of it in the wind.

They flee something that may lose them money in the short term but make them some in the longer term, and race to a place that offers them almost none but seems quiet and calming.

News operations, which always cover the stock market like a horse race or sports competition (someone wins, someone loses) always have a field day with this chaos. But that’s their stock in trade.

The reality is that this kind of herd panic flies in the face of all intelligent investing principles. Some of these are:

•     If you have a good stock, stick with it through market ups and downs. In the long term it will grow.

•     Only invest a small proportion of your money in speculative stocks; if they go down, you’ll only be singed a bit, but it they go up, you’ll likely add some rocket fuel to your investing.
•     Do some homework. Ask, How does this company I’m investing in make money? If that doesn’t change, then you shouldn’t either.

•     Invest in quality and avoid the vague.

•     Stay away from the extremely popular. Popularity is fleeting, and the herd always moves on to another field. So what if you miss out? Another opportunity always comes along.

•     Keep a large chunk of your money in interest-earning bonds or well-paying dividend stocks. Most money in the market is made slowly and in increments (i.e. interest and dividends), not by jumping onto some apparent rocket, which could go down as fast as it goes up.

•     Don’t invest much in your own industry – your livelihood already depends on it, so why put all your earning eggs in one basket?