Time for investors to get nervous?

What is comfortable is rarely profitable

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Dow Jones (Index: ^DJI) fell on Friday. It also fell on Thursday. And the day before. It fell every day last week, in fact. It also fell the Friday before that. Two weeks ago, it fell for six days straight.

Add it up, and the Dow has declined in 12 of the last 13 trading sessions.

If that sounds like a lot, it is. Going back to 1928, the most number of times the index has fallen in any 13-day period is 12. It's done that two-dozen times, so recent losses didn't break any records.

The Dow is only down about 7% from its high in early April, and is still up for the year. But a long string of declines makes investors nervous. And we're a fickle bunch: There's a joke in investing that the definition of a blink of an eye is the precise amount of time it takes pundits to go from "bullish" to "Dear God, sell." Add to it that people naturally look for patterns (and assume patterns will keep repeating), so that when stocks fall day after day, we worry.

In his excellent book Your Money and Your Brain, Jason Zweig shows how recent results affect how investors feel about risk. In the most simplistic terms, neurons that hold memories about rewards and punishments from recent events are more active than those of the distant past. "Because your most recent experience carries more weight," Zweig writes, "these neurons evaluate the likelihood of a gain based mainly on the average result of your last five to eight attempts at making money — with almost all the influence coming from your last three or four tries."

With stocks down almost every day in the last two weeks, you can see why the current mood, particularly among media analysts, is so glum. "Brace for more selling," a headline on a major news site read Sunday evening. No journalist has ever successfully predicted weekly market moves, but who cares? Stocks have fallen so frequently lately that no one will question the logic.

Whenever there's a long string of market declines or a big sell-off, I remind myself of an important piece of context: all of the past market declines that we don't even remember, or at least don't talk about, anymore.

Take last year, for starters. From April to September 2011, the Dow fell more than 16%. In came the usual litany of predictions telling investors to sell everything. "I definitely believe the sky is falling," said noted analyst and CNBC guest Dick Bove. "You can call me Chicken Little if you'd like." Stocks bottomed weeks after his call, and went on to rally nearly 25%.

Then there was 2010. The Dow fell 14% from April to July that year. Google searches for the phrase "double dip recession" went up 20-fold. Little came of it. Stocks jumped 30% within a year.

Few investors remember the 8.5% sell-off in March 2005, but it was a big deal at the time. As inflation picked up early in the year, Fed Chairman Alan Greenspan told Congress he felt interest rates were still "fairly low." By most accounts, those two words made investors think the Fed would jack up interest rates and push the economy into recession. A recession eventually hit, of course, but not for years, and not because of high interest rates. After the 2005 pullback, the Fed hiked interest rates slowly, the economy boomed for another three years, and the Dow rallied more than 40%.

Most remember 1998 for the roaring stock market, but the Dow actually fell 19% in the middle of the year — then one of the biggest declines since the Great Depression. Russia defaulted on its debt, a big hedge fund blew up, and everyone freaked out for a few weeks. Then they got over it. Stocks surged.

These stories should remind you of two important points.

One, market pullbacks happen. They happen every year. They're a perfectly normal part of how investing works. They don't mean the world is coming to an end. They're just something markets do from time to time. "[P]eople see the next 2008 in every setback," blogger Josh Brown wrote last year. There's Zweig's point about short-term memory clouding our view of risk. But the truth is, the overwhelming majority of pullbacks are mild and short-lived. That's why most don't even remember them.

Two, and more important, those pullbacks can provide some of the best buying opportunities. You will never convince the average investor, amateur or otherwise, that you should get nervous when everything feels great, and bullish when it hurts so bad you can't open your brokerage statements — but that's exactly how successful investing works. How ironic it is that we fear the next market decline without remembering that the last one gave us a chance to earn a 25% return within months.

"What is comfortable is rarely profitable," investor Rob Arnott once said. Has the recent pullback made you uncomfortable? Good. It tells you something about what to expect tomorrow.

If you're in the market for some high yielding ASX shares, look no further than our "Secure Your Future with 3 Rock-Solid Dividend Stocks" report. In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

 More reading

The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by Morgan Housel, originally appeared on fool.com

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »