Why You Shouldn’t Waste This Bear Market

Reading about stock market downturns and experiencing it first hand are two very different things. Author and financial journalist Jason Zweig may share the same sentiment. In his book, Your Money and Your Brain, Zweig said that believing that you are fearless is very different from actually being fearless.

Said another way, an estimation of the risk that we think we can endure may well be different from what we are able to endure in real life. This sentiment is captured well in a little story about risk shared by financial planner Carl Richards. This is how a veteran Wall Street stockbroker described risk to Richards:

“Let’s assume you’re moving into a high-rise condominium in Florida, and there’re only two units for sale,” he said. “One is the penthouse — beautiful view, amazing balcony, but it’s 37 floors up. The other is a garden-level walkout unit. Not the same view, but on the first floor, and your door exits right onto the street.”

He continued, “You want to know the risk tolerance of your clients? Just ask them which one they’d choose. If they choose the penthouse, they can handle a lot of risk. If they choose the garden unit, they’re very conservative investors.”

But Richards did not stop there, he continued on with his own thoughts on this concept:

“It’s a really great story, and I’ll always remember it. But it’s also total garbage.”

Needless to say, Richards’ take was very direct – the Wall Street broker’s method to asses his clients’ risk is rubbish. I’d revisit this again, so keep this in mind for now.

Fearful times

Some might say that we live fearful times in the Singapore stock market at the moment. At its current level of 2,814 points, Singapore’s market barometer, the Straits Times Index (SGX: ^STI), has tumbled by over 20% from its 2015 high of 3,550. By definition, a 20% fall is a bear market. And while the index has rebounded somewhat of late (up 9% over the past month), we’re still in a bear market.

The sell-off suggests that there are stock market participants who were fearful, and maybe, still fearful.

Coming to terms with our own fears in investing may present a better way to gauge our own tolerance towards bear markets or investing risks. We may want to look at our own behaviours during this current bear market.

As a start, some pertinent questions for yourself could be:

  1. Have you sold any stocks?
  2. Are you tempted to sell your stocks?
  3. Were you able to hold your stocks without selling?
  4. Are you having trouble sleeping while holding your stocks?
  5. Do you feel uncomfortable because you had put too much into one stock?
  6. Do you feel uncomfortable because you committed too much to stocks overall?
  7. Did you have cash in your portfolio when the market fell?
  8. Were you able to buy stocks when the market fell?

The key here is to understand the source of our own fears, be it the size of our investing positions or the companies that we have bought. As odd as it may sound, the current bear market is a good thing – it offers us a real test of our risk tolerance, unlike the frivolous risk test recounted by Richards above.

We might not want to waste this opportunity to learn about ourselves. It is as good as any when it comes to learning about our true tolerance to losses.

Foolish takeaway

Investing is an endeavour which is as much about temperament as it is about analysis. Even if we have done our homework in investing, it may come to naught if our own fears prevent us from executing our plans. As such, consider putting some thought into finding out more about yourself. Right now. Don’t waste this bear market.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.