The Power of Negative Thinking

If you are behind is saving for retirement, let’s hope the stock market goes down.

article top

There is an old adage that opportunities do not go away, they just move on to someone else. A case in point can be found in observing the behavior of 401(k) participants in down markets. Specifically, there is a veritable boatload of data illustrating the tendency of plan participants to both halt their contributions to employer plans during market downturns and to move their savings out of stock mutual funds and into investments they perceive to be safer such as bond and money market funds. These are exactly the opposite responses retirement savers should have when faced with a bear market.

These mistakes are typically fueled by a lack of financial literacy and the flawed way evolution has hardwired our brains to cause us to fear bear markets in the same manner in which we have justifiably been conditioned to fear an actual grizzly bear. As a financial planner, one of my greatest frustrations is watching people make these mistakes over and over again. It is also why I am so passionate about educating consumers to help them realize that what they perceive as adversity may actually represent a remarkable opportunity to catch up. 


Making the Stock Market Tangible

The first step in helping consumers overcome their fear of market volatility is to help fundamentally understand the investments they own in their retirement accounts. In my experience, most consumers view the stock market as a complex, ephemeral, intangible entity whose gyrations are manipulated according to the whims of some mystical higher power. In my opinion, the financial news media does a tremendous disservice to consumers by perpetuating this myth.  In truth, the underlying investments in the stock mutual funds in your retirement accounts are ownership shares in companies that are every bit as tangible as your house, your car, and your bank account.

To help people understand this, I often break out a list of the companies that comprise the S&P 500 Index. Most of these companies are household names that make products or provide services that we all use and value. Most importantly, I point out that the vast majority of these companies have long histories of profitability and that, while the share prices tend to bounce up and down seemingly at random, the real reason why the stock market has always gone up over time is that as the companies’ earnings grow over time, they are inherently worth more, and eventually this value is recognized in the value of their share prices. Of course, some companies fail over time but if you have enough companies, you can diversify away much of the company-specific risk. Investing in stock mutual funds for long term growth in a 401(k) plan really is that simple and that tangible.

Overcoming Loss Aversion

Behavioral finance research has demonstrated that consumers feel the pain of investment losses more than they value investment gains.  This is often illustrated through the example of how most consumers would gladly wager $1 on a bet to win $2 on the outcome of a coin flip, but few would wager $100,000 to win $200,000. The pain of loss far outweighs the gratification one would receive from even a disproportionately large gain. In applying this to investing, consumers are always happy when the stock market is rising, but they disproportionately feel losses when those gains evaporate in market downturns. 

Helping consumers to differentiate between temporary declines in value and permanent losses is a key to overcoming loss aversion. To do this, I often show plan participants how there have been many, many declines in the stock market of 20%-50%+ over the past half century.   Some, such as the 1987 “crash” and the COVID-induced bear market in 2020, were short in duration, while others, such as the back-to-back bear markets of 2000-2002 and 2007-2009 took a few years to unfold and few more years to recover. The causes of all declines are different, but the reason why the stock market has eventually recovered 100% of the time is that most of the companies that comprise the stock market continue to be profitable and eventually their value is recognized.

Armed with this knowledge, retirement savers need to proactively rewire their minds to view stock market downturns not as adversity but as opportunities to buy more shares when the markets are depressed.  In fact, as counter-instinctive as it may seem, if you are saving for retirement many years from now, you should actually hope for prolonged periods of depressed markets during your working years. To illustrate this concept by example, every dollar that you invest when the stock market is down 50% from its previous high will double in value when the market eventually just gets back to even. 

Conversely, if you sell in panic when the stock market is down 50%, you will indeed suffer a permanent loss. Why on Earth would you do that when (A) you know that has been a losing bet 100% of the time in the past, and (B) you are pretty darn sure the companies you own are not only not going away, but are likely to continue to grow their profits for many years to come?

Advice for Today – The Power of Negative Thinking

As of this writing the U.S. stock market has been bouncing around between 15-20% below the all-time high it reached in late 2021. It is well-established that most American workers are far behind in saving for retirement. If you are one of them, I hope this article inspires you to recognize the current downturn for the opportunity that it is.  Understand that the near-term direction of the stock market is inherently unpredictable, and that there is no way to discern in advance whether this latest bear market will continue or whether a recovery is imminent. From your perspective, you should keep your fingers crossed that the market stays depressed enough and lasts long enough for you to invest enough money to enable you to catch up when the recovery eventually occurs.


John H. (J.R.) Robinson, Personal Finance Editor at Hawaii Reporter, is the owner/founder of Financial Planning Hawaii, Fee-Only Planning Hawaii, and Paraplanning Hawaii.  He is also a co-founder retirement saving and retirement spending software-maker Nest Egg Guru.