Lows feel scary … but wait … who buys when you are scared? People used to feel okay during the lows because the trend was “always” up. Now this is really simply confusing because a continuous up may actually be riskier for a couple of reasons. One, that’s how bubbles start. And two, trends end which means the trend may turn the other way for awhile. Yet, that trend may eventually end too. In other words, cycles.
But wait … buy low … who is selling and why? And wait … they can’t sell to nobody (can’t sell into thin air) so that means there’s a buyer. Who is buying and why?
You are supposed to buy low, but you are fearful of the news. The sellers are more than willing to sell. And that’s a point, they are more willing to sell but at a lower price. And that lower price is what makes the markets go down and that is what is scaring more people so they are more willing to sell at a lower price too.
Why do they sell? To get into something “safer.” This is the fear emotion. Typically this means they realize their losses (if they hold, they only have paper losses, not realized losses … which means values may rise once fear has left the market and the holding may be perceived to have higher value again (or it may be perceived less favorably in which case the price would stay lower than before)).
Who’s the buyer … they actually have an opposite emotion – greed. They recognize what buy low means so they are more than willing to buy from you at a low price. You see, that is where profit comes from and the meaning of the saying. BOTH emotions are existing simultaneously in the same market and the same moment in time.
So while many are fearful, there are others who are optimistic with a larger picture that fuels their emotion. These emotions are the fuel for the overall market cycles.
There is risk doing that with individual company stocks … they may go to zero value. However, you can remove much of that “unsystematic” risk through broad diversification through an index fund. Now the risk that remains is what is called “systemic” risk which is the general risk that remains in the economy. Different economies, or markets, help diversify that as well so what remains is exposure to global economic and market forces (and that can not be diversified away unless a new market were established on another world).
You may regulate the volatility of your portfolio by adding less volatile ingredients such as short term bonds through another indexed fund. How you mix your investments is how you may regulate highs and lows in your portfolio (not your water cooler friend’s or neighbor’s portfolio … that’s them, not you).