Why The Stock Market Terrifies Us

“all finances are personal”.

The S&P 500 Index is up 300% since bottoming out in early 2009. However, most people’s perception of the stock market is the complete opposite. Nearly two-thirds of people think the stock market has either not gone up at all or actually gone down since the financial crisis according to a new report from Betterment.

When asked how they think the S&P 500 has faired over the past 10 years

• 48% of respondents thought the stock market has not moved at all.
• 18% of respondents thought the stock market has gone down over that time period.

So what is causing this misconception? the Betterment report points to the fear and pain caused by the financial crisis distorting the average person’s perception.

I’m inclined to agree with them. During the financial crisis, millions of people lost their jobs, their homes, their savings and many had to delay their retirement by years.

There is a saying that “all politics are local”. The idea is that the average person is much more concerned about the pothole on their street or the garbage getting picked up than they are concerned about the federal government’s foreign policy. I’d like to coin a new phrase and argue that “all finances are personal”.

If we have of our finances in order and we view ourselves as doing great we are much more likely to believe the stock market and the broader economy are doing great. If we are buried in student loans and credit card debt and have constant financial anxiety, we are much more likely to believe the stock market is doing terrible.

The financial crisis struck a massive blow to the average person’s finances. 10 years later, 65% of respondents in the Betterment survey say they have still not fully recovered from the financial crisis. This weak recovery permanently altered how we view money and investing. Those who had a retirement plan in place in 2008 reported the following changes since the crisis.

• 15% say their employer stopped matching contributions or even stopped sponsoring their 401(k)
• 27% stopped contributing to their 401(k) or saving for retirement.
• 14% put all of their savings in cash

The financial crisis instilled a fear of investing in the average person. I was only 20 and had no money invested in 2008 but I can only imagine the dread millions of people must have felt as they watched their retirement savings, that they had spent a lifetime building melt away before their eyes. If that does not instill fear in a person, I don’t know what will.

Those who saw their retirement fund cut in half in 2008 forever changed how they view retirement savings. The 401(k) is a fantastic saving vehicle. Contributions are tax-deductible and matched by most employers, which is literally free money. Yet after 2008, 27% of respondents stopped contributing to their 401(k). While another 14% put all of their savings in cash, allowing inflation to eat away at their savings.

The saddest part about the whole thing? Those who were scared off from reinvesting in the stock market were the ones who never recovered their financial position. If you sold off your stock portfolio at the bottom of the market you would be selling for somewhere in the range of 40 cents on the dollar. To add insult to injury you would have also missed out on the 300% increase the stock market has produced over the past 10 years. Fear has kept people on the sidelines and their retirement savings have suffered as a result.

Managing The Fear

For the investor, reducing the number of decisions you make can be an effective way to manage fear. Fewer decisions mean fewer chances for you to make bad decisions when things get really scary. And things will get really scary again at some point.

Personally, I take a passive approach to investing through low-cost index funds. Instead of buying individual stocks, I buy into the whole stock market. If the stock market crashes, I won’t have to think about which stocks in my portfolio to hold, which to sell, and which to buy back more of. I just sit and wait (and hope) for the market to recover, which to this point in history it always has. It works for me, but you should sit down with an advisor and figure out what works for you.

I also avoid checking the balance of my retirement accounts. There has been tons of research that shows that the investors who have the best performance are the ones who hardly ever check their account balances. In fact, Fidelity did a study that found the best-performing investors all had one thing in common: they were dead. And do you know what dead people have in common? They never check their account balances and they never make fear-driven decisions when the market tanks.

If the idea of a stock market crash freaks you out, read this article about “What happens after a stock market crash”.

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This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.