It was an extremely turbulent Monday (August 24, 2015) for U.S. stocks, driven by fears about China’s economic slowdown. Stocks then staged an unconvincing comeback that nearly brought the Dow back into positive territory, but ultimately failed.
The 588-point decline was the worst for the Dow since August 2011.
Within minutes after the opening bell, the Dow plummeted 1,089 points. That is the largest point loss ever during a trading day, surpassing the Flash Crash of 2010.
Dramatic declines caused stocks and exchange-traded funds to be automatically halted by stock exchanges more than 1,200 times on Monday, August 24th, according to Nasdaq.
September, 2015, has surely been a bumpy month and then some. We all feel helpless and acutely scared of loss when the market is uncertain, going down, then up, then down a little more.
What fuels this uncertainty further is when the media reports that since Janet Yellen DIDN’T raise interest rates we must be in real trouble. China and its opaque leadership signals weaker growth and a weakening of their currency. Then you hear experts interviewed who speculate that we are in for a major depression, that demand is weak and deflation is right around the corner. YIKES!
Watch the media interviewers pump up the intensity of these remarks by papering the TV monitor with: FLASH NEWS ALERT: MAJOR DEPRESSION, WEAK GLOBAL DEMAND, DEFLATION, UNCERTAINTY GOING FORWARD !
As Nate Silver, of #FiveThirtyEight (the statistician who predicts based on statistical facts), has said, you have to learn to distinguish between the signal (what really predicts) and the noise (what appears to predict). Individual investors can get into trouble believing the noise is a signal.
How can we as independent investors learn to “read the tea leaves” of the market’s vicissitudes if we don’t have a background in finance and investing and years of seasoned experience?
We don’t have as much access to information or seasoned experience that many advisors have, but we do have common sense! The issue is whether we can engage our rational common sense mind when we are under the threat of losing money in a market we have trouble interpreting.
Understanding our cognitive biases in situations of risk can help fortify the resolve to stay invested during a market correction or down period. Let’s say you know that you are hard wired to be risk averse and that financial loss has a negative intensity at least twice that of a positive financial gain. Would that knowledge help you to look at your stock declines and NOT sell into the downdraft?