We don’t get to choose when the market sells off. For most of us, this dip in the market is just another aberration on the long journey from start to finish. But for some, this market correction is occurring at a very sensitive time. An estimated 3 million people have chosen to retire early since the start of the pandemic. More than 50% of Americans over age 55 are now retired. Easy monetary policy and the threat of changing tax laws lead to a record number of sales of privately held businesses last year. These newly retired and newly liquid investors are feeling this selloff in a different way.
The human brain is not designed to take a pile of money, put it at risk to daily fluctuations in value, and focus on what it could be worth three decades from now. Our brains react to danger in the moment. If our ancestors saw something that looked like a tiger, they ran away. It didn’t matter if they were wrong, they lived to see another day.
This ‘fight or flight’ mentality works against us when the market drops off the next rollercoaster cliff. Remember the last time you rode a real rollercoaster? That first drop is the scariest. After that one, the subsequent drops and flips, although just as dramatic, are unable to pack the same adrenaline punch.
Investors who have been on the train for a while don’t worry as much about the selloff du jour. They weathered the Covid crash, the Christmas 2018 dip, the Great Financial Crisis, the Dot Com bubble, and maybe even Black Monday. In our middle age of investing, we adopt the armor of “been there, done that.” It’s a coping mechanism that works.
But imagine you retired in December and took a lump sum from a pension plan.* The S&P 500 index drops 8%, the Nasdaq drops 12.45%, and small-cap stocks flirt with bear market territory, down 18% from their all-time highs in November. That’s a scary first leg down, especially for someone who has just made a major life change.
Now imagine you sold the family business last year. Your life’s work, or possibly the work of several generations, has just been turned into a pile of cash for you to invest. The last thing you want is to ‘lose’ that hard-earned money in the market. The anxiety over when to invest is a heavy burden. The best thing you can do in this situation is practice letting go of the things you can’t control.
Case in point, I started writing this blog when the market was selling off hard this morning. There was a massive intra-day reversal, and the averages ended the day in the green. The market humbles me every time.
All rollercoasters scare me (in a good way), but there is one in particular that freaked me out. The Titan at Six Flags in Dallas has a tall, steep drop that made me nervous as I waited in the 2-hour line to ride. As the train climbed that first hill, my heart pounded. But it wasn’t until the train went over the cliff that I saw the drop was further than I anticipated. The drop actually went underground into a tunnel. I screamed several choice words on the way down, and to this day I feel I owe an apology to the church youth group riding that same train.
Like recent retirees, freshly liquid business owners, or newbie investors, I white-knuckled the first drop in that rollercoaster. I’m not sure if this afternoon’s reversal was a bottom to last week’s selling route or if that was classic bear market trading behavior. It certainly felt like the latter. Either way, we don’t get to choose.
* Cashing out of pension for a lump sum is a major decision and should not be taken lightly.