The Issues, No. 51 - Individual Investors

It appears to me that a large number of individual investors are reacting to the current financial crisis with panic and fear and I find that to be quite amazing and even a little depressing. I would like to think that Americans are smarter than to react to swings in the stock market with panic and fear. The American stock market has historically gone up and down and so the current downturn is no more than a natural occurrence that will end shortly and begin once again to rise after the corrections are in place and the panic has abated.

I think, not surprisingly, that the big downturns in the stock market are always caused by out of control greed in one sector of the economy or another. And, I think the correction is always engineered and financed, to some degree, by the government. But the greed, until it eventually causes a downturn, is what all of us individual investors ride on while it lasts. Then, when the downturn comes many of us act as if we had been betrayed by the companies we have invested in, we panic, and sell all of our stock, but probably not until it's value has declined significantly. So, for those that panic and sell, they end up with little or no profit, no shares of stock, and they are a cause for the market to continue to decline. And, when the market again begins to rise, they are the very people, who wait until they are sure the rise is going to last and then buy stock again when the price is high. If they had just left their stock alone when the market started to rise again they already would have the number of shares they had before the fall and would benefit from the rising prices. So, patience, in this case, rather than panic, is definitely a virtue.

I think everyone needs to realize that participation in the stock market is gambling. When we buy stock we are gambling that it's value is going to increase and that we will make some money. And isn't gambling a form of greed? Investment gurus have been advising people forever not to put all of their money into stocks but rather to spread it around. No one should put more into the stock market than they can afford to lose but on the other hand, not too many people who have invested wisely in the stock market have lost a whole lot in the long term. It's the people who are trying to get rich quick and risk too much on individual stocks who end up getting hurt the most. But for most of us small investors, who have money in IRAs or 401Ks that are in mutual funds, fear and panic is not going to help our situations. Patience will prevail and, in the case of the current financial crisis, our accounts will recover eventually. We have to keep in mind that we haven't actually lost or gained anything until we sell.