When prices fall

Everything so far assumes you keep investing through the bad years. That's the hard part. The math takes an afternoon to learn. Sitting still while your balance drops can take years to learn.

Falls are normal

Volatility means how much prices swing, and stocks swing a lot. A drop of 10% or more at some point in the year is common, even in years that end with a gain. Big falls are rarer and much scarier.

• From late 2007 to early 2009, US stocks lost more than half their value and took several years to get back to their old peak.
• In early 2020, as the pandemic spread, stocks fell about a third in roughly a month, then recovered to a new high within six months.
• Japan's stock market peaked in 1989 and took 34 years to reach that level again.

The last one is a good reason to own companies from many countries, so no single market can hold you hostage for decades.

Why people sell at the bottom

In experiments, a loss hurts roughly twice as much as an equal gain feels good. The psychologists Daniel Kahneman and Amos Tversky called this loss aversion. When your balance falls by $20,000, every instinct says get out before it gets worse. Selling feels like taking control.

Here's the trap. Selling turns a temporary drop into a permanent loss. Then you have to decide when to get back in, and most people wait until it feels safe, which usually means after prices have recovered. They sell low and buy high, the exact opposite of the plan. The market's best days also tend to arrive close to its worst ones, so people who jump out often miss the rebound.

Try a 50% fall and a 50% rebound. A gain applies to the smaller balance, so getting back to the start requires 100%, and no rebound is assured.

This shows up in real money. Morningstar compares what funds returned with what their investors actually earned, given when they bought and sold. Investors usually earn less than the funds they own. In its recent US studies, the gap has been a little over one percentage point a year. You know by now what 1% a year does over 30 years.

How people stay put

• Only invest money you won't need for years. If rent depends on it, a crash forces you to sell.
• Keep an emergency fund in cash, so losing a job doesn't mean selling shares at the worst time.
• Invest the same amount automatically each month. When prices are down, your $200 buys more shares.
• Check less often. Daily prices are mostly noise, and every look is a chance to panic.
• Decide your mix of stocks and bonds while you're calm, and write down why.

If you're adding money every month for decades, a crash in your twenties isn't a disaster. You spend years buying at lower prices. The person who gets hurt is the one who sells.

That's the end of the course. The rabbit holes below go deeper, and you can fork any sentence on any page into a new one.