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Staying calm in a stock market driven by fear.

October 11th, 2008 · Greg Atkinson · No Comments

You will often hear people talking about how the stock market is driven by the human emotions of fear and greed, and at the moment it is pretty obvious that the market is being driven down by fear. So how can you stay calm in this environment and not let fear cloud your judgement?

Sometimes I hear people say “I lost a fortune in the stock market recently” and I will reply “What stocks did you sell?”. Often it turns out that they have sold nothing, but they were referring to the current unrealised losses in their portfolios. Unrealised losses are like unrealised gains in that they are…”unrealised”, you have not actually lost anything until you sell the stock for less than you purchased it for. So relax, if your have shares in a good quality company then the stock price may recover over the longer term. Your portfolio may not look good today, but history tells us that over time the stock market will recover, go into another bull phase and then suffer another rout. (sadly I have no idea when any of these events will occur)

Another thing people tend to forget in times like these are dividends, and many companies are still paying out generous dividends even in the midst of this current mess. If you have structured your portfolio well, you should be still reaping the benefits of some income from dividends. So rather than being depressed about the current value of your portfolio why not add up all the dividends you have received over the last few years, or maybe you can even think of the things you have purchased from the proceeds from those dividends…sometimes the market is good to you isn’t it?

At present the fear driven stock market means we have panicked investors big and small exiting the market completely. These investors are not focused on fundamentals or what the underlying value of company XYZ is, they are just getting out because they think the market will fall further or they need to deal with margin calls etc. So why would I sell my shares during a rout in the stock market when the chances are I will not get a fair price for them? Yes the market may fall further, but if hold stocks in quality companies then it does not make me inclined to sell, and actually I am more inclined to buy when others are rushing to sell.

Finally you are not a failure because your portfolio is looking a little ragged and you have some nasty unrealised losses. Remember you need to expect to have losses sometimes and that the stock market is not a constant ride upwards… see Investment Tips… even the seasoned professionals are hurting at the moment, it is just the way things go sometimes. So try and stay calm, spend time with your family and friends and let’s see where the market is in a few months time.

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