Why “Staying the Course” is Difficult for Many Investors

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Having been a financial advisor for 17 years, I have experienced several volatile markets.  The volatility we are currently experiencing is due to the Covid-19 outbreak. Obviously, my position as a financial advisor does not qualify me to assess the public health impact of Covid-19.

However, I feel confident in asserting that

  • (1) the current economic hardships will conclude at some point in the future, and
  • (2) staying invested in a high-quality, diversified portfolio is still investors’ best path to achieve their long-term goals.

The second point here could simply be restated as “staying the course.”

This advice is so common that it borders on the cliché. Well, cliché or not, it is the best course of action. So then, why do so few investors adhere to it, selling out of the market when it’s at the bottom and locking in losses?

It is well documented that overall, investors are best suited to staying in the market during times of turmoil, as study after study shows that time IN the market is better than TIMING the market. Surface level analysis lazily attributes this phenomenon to investors’ emotions simply getting the better of them.

I want to dig a little deeper. In this blog, I will describe what I believe are the causes and thought patterns that drive people to sell their investments when market values are at or near their lowest point in the economic cycle. By understanding the “why” behind these feelings, I hope to help readers avoid this common pitfall.

Challenge #1 – Market Volatility Seems to Threaten Our Need for a Secure Future

Presumably, anyone investing money has at least some discretionary income. Put another way: basic needs require satisfying before someone would rationally invest money. I consider this behavior to be hierarchical – first, basic needs (i.e., food, shelter, comfort) are attained, then saving and long-term investing can commence. It’s my opinion that the predominant motive for individuals to invest their money long-term is so that they have the option to retire securely at some point. For purposes of this blog, securely means sufficient food, shelter and a reasonable standard of living. You sacrifice the benefits of additional income today so that your future self will be secure.

The Idea of Saving for Retirement as a Sacrifice

Sacrifice is a common practice in society: give up something now for the promise of a better future. Various faiths encourage personal sacrificing, such as fasting. Examples of other everyday sacrifices abound, including exercising (for better health in the future) and volunteering (for our community to have a better future), even working (for your family to be provided for now and in the future).

I believe there are two major differences between investing for one’s future versus the common sacrifices listed above.

  • Saving for Retirement Requires Time: The first difference is one of duration. Successful investing demands many years to see meaningful and permanent results. As an example, the power of compound interest only truly manifests after multiple compounding periods over numerous years. Conversely, the religious practice of fasting lasts only certain hours and/or up to a few weeks, often with practitioners eating at night. Along the same lines, if I begin training vigorously at the gym or for a long-distance run, I will most likely notice progress after only a comparatively short period of time.
  • Investors Feel a Lack of Control: The second difference between investing for one’s future and other common sacrifices is control. So much of investing involves things out of our control, such as Fed policy, actions of our elected officials, corporate scandals, global pandemics, etc. The list of things out of an investor’s control is seemingly endless. Compare that lack of control to something like volunteering at a local shelter where the volunteer has a great amount of control. Volunteering, by definition, is not mandatory. Hours can be adjusted, schedules rearranged and absences (mostly) forgiven. Obviously, volunteering demands a high-level of professionalism, commitment and obligation – it’s just not a requirement. Many everyday sacrifices function the same way. They could cease if there was a sufficiently valid reason to do so. I can struggle to maintain a commitment to eating well and exercising with no valid reason, but I’m working on it!

The Need to Quickly Gain Control Leads to Investors Selling Out of the Market

When markets are volatile, our goal of achieving a secure future in retirement is under siege by forces completely out of our control. We have sacrificed our current income for years in order to provide for our future. Market volatility tends to make us feel as though our most fundamental physiological and safety needs are being torturously ruined.

We might ask ourselves: “How on earth am I ever going to even pay my bills, let alone take trips and enjoy life with my family in the future if this market crash robs me of my nest egg?” As a result, the urge to “cut my losses” becomes ever more attractive the farther markets drop in value. We no longer consider ourselves long-term investors because it will take too long to recover our losses. The situation becomes too painful, and we sell in order to “stop the bleeding.” This action tends to occur near the bottom of most down markets.

Challenge #2 – Media Reporting During a Crisis Contributes to a Feeling of Vulnerability

When I think about the media and news reporting, I am frequently reminded of a conversation I had with a client years ago. He told me that he once had a job as a pizza delivery man. One particular point of emphasis the company made on their drivers was to not do anything to harm the company’s reputation. The company advised their drivers that when someone has a bad experience with a company, particularly in food service, the customer is likely to tell up to seven people.

In contrast, he was told, when a customer has a good experience, that customer is likely to tell only one or maybe two people – assuming they even tell anyone at all! Rarely do positive experiences garner people’s attention to the same degree as negative experiences do.

News stories that are negative, disruptive and violent tend to garner larger audiences, resulting in more advertising revenue for the company. As such, those stories will naturally dominate headlines. While writing this blog in the middle of the Covid-19 outbreak, I repeatedly read and hear the following extreme language to describe financial markets: crisis, panic, shock, war, dire, soar, plunge and unprecedented. A colleague of mine once quipped, “Would you get into an elevator whose only two options were either “soar” or “plunge”? Unfortunately, those are two extremely common words the media uses to describe movements in financial markets.

Adjusting for Scale

Furthermore, measures taken by the federal government or other entities like the Federal Reserve to address serious matters in the economy and financial markets are frequently pronounced as being the “largest” or “most severe” measures ever taken in the history of the United States. While some of these statements or headlines might be technically true, scale matters.

Our economy has grown significantly throughout history, so naturally bailouts, stimulus and deficits are usually going to be the largest in history at that present moment. You have to adjust for scale in order to get a fair comparison between different periods in our country’s history.

Just think about the size of the mortgage on your first home compared to the final mortgage on your last home. I would imagine those numbers are significantly different. Lastly, I regularly hear and read evocations of the Great Depression during these times, and how we could potentially be on track for another one…soon.  No wonder why investing makes many people so anxious!

To be absolutely clear, I am not suggesting that the Covid-19 outbreak, the credit crisis of 2008 or any other event past, present or future that causes market volatility is somehow unimportant or inconsequential. What I want to draw attention to is the manner in which these events are reported and promoted. They add to the stress of many investors, causing them to liquidate their investments at or near market lows, thus locking in losses.

Challenge #3 – Market Volatility Begins to Threaten Our Need for Present Day Safety

In Section 1, I made the points that individuals who invest (1) have at least some discretionary income and (2) sacrifice that discretionary income for future safety needs. However, if an economic slowdown is severe enough, then it can be reasonably expected that there will be a significant spike in job loss. What happens to investors when current economic conditions become serious enough to threaten their current income? They end up selling their long-term investments out of fear and then hold the cash proceeds. I believe this reaction stems predominately from two issues.

Insufficient Cash Reserves

The first issue is that many people do not have sufficient cash in an emergency fund. There is a rule of thumb that one should have 3-4 months’ worth of expenses in cash instruments (checking, savings, money market, etc.). This rule originates from the average period of time required to elapse before a long-term disability policy begins paying out benefits. This period of time before one receives benefit payments is the “elimination period.” Most elimination periods are 90 days, and the vast majority of disability policies are reimbursement policies.

Therefore, one has to wait until the end of the fourth month of disability in order to receive any payments for lost wages. This is why the 3-4 months of expenses guideline is commonly recommended.It can be debated as to whether or not 3-4 months’ worth of expenses is sufficient – that is a topic for another blog. What is relevant is the fact that the vast majority of people do not come close to this amount of cash in reserve.

Consequently, any income loss due to being furloughed or permanently laid off during an economic downturn will result in individuals raiding their investment accounts in order to regain a feeling of security.  This action tends to occur after financial markets have already dropped significantly in value – yet again, locking in losses.

Selling Relieves Current Stress of the Unknown

The second reason investors sell their investments and sit on cash is simply to relieve stress. Economic downturns are immensely stressful. It’s hard to overstate this point. Here’s a short list of just a few developments that could threaten the average working adult during an economic downturn:

  • The company where the individual works going bankrupt or suffering some corporate malfeasance
  • Being laid off or taking a pay cut
  • Home foreclosure
  • Personal bankruptcy filing
  • Not being able to find another job in your chosen field
  • Being forced to change careers and accepting less money to do so

These misfortunes don’t even have to befall investors themselves. They could happen to neighbors, loved ones or co-workers. In times of great stress where one’s immediate financial security is in jeopardy, taking action, any action, is a way for individuals to re-gain some piece of mind over their financial livelihood.

The action that far too many people take is to convert some or all of their long-term investments to cash. This action tends to occur (you guessed it) right after the financial markets have dropped significantly, thus locking in losses.


On the whole, markets experience volatility because of uncertainty, which takes many forms: wars, energy prices, corporate malfeasance, credit crises and global pandemics – to name a few. Investors will question their long-term plans and goals.

It is critical for people to meet with their financial advisor during these times. A productive meeting with a financial advisor will help steady nerves, which will prevent investors from making the very mistakes I have described.

In the middle of the 2007-2009 credit crisis, AKA the “Great Recession,” Warren Buffett, wrote an op-ed piece for the New York Times, entitled “Buy American, I Am.” The date was October 17th, 2008. The Dow Jones Average had not yet reached a bottom but from a valuation standpoint it was darn near.  Buffett wrote:

“Today people who hold cash equivalents feel comfortable.  They shouldn’t.  They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.”

Volatility is an unfortunate reality of investing in stock, but so is growth. On Black Monday, October 19th, 1987, the Dow Jones Industrial Average dropped 508 points. It was the largest single day drop in its history (22.6%), and finished at 1,738 (Investopedia.com). Today (as of this writing), April 1st, 2020, in the midst of a global pandemic, the Dow dropped 974 points and finished the day at 20,943 (Marketwatch.com). Despite everything, that is over 1,100% of growth.  Long-term equities investment is a powerful strategy.

A diversified portfolio does not assure a profit or protect against loss in a declining market. The opinions are those of the writer, and not the recommendations or responsibility of CWM, LLC, or Cetera Advisor Networks LLC or its representatives.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.

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