J.P. Morgan, the legendary turn-of-the-century
American banker, was often asked what the stock market's next
move would be. He responded "It will fluctuate!" Although
most investors readily accept this answer on an intellectual level,
the volatility of the markets is far harder to deal with emotionally.
One can say confidently, "Of course I understand the market
goes down as well as up." But plummeting averages and increased
media coverage induce a fear that causes some investors to flee
to the safety of short-term assets, such as money market accounts and certificates of deposit.
Public enthusiasm for investing in stocks tends
to come and go in cycles that echo the market's own rhythms.
When the market rises for a sustained period of time, the idea
that stocks can suffer serious declines tends to be dismissed
by some investors as an old-fashioned notion that may have applied
in previous eras but has no relevance to the current one. Conversely,
a real bear market — that is, a decline of 20% or more that
stretches over a number of months or even years — demoralizes
many investors so thoroughly that they lose sight of the favorable
long-term outlook for stocks. In short, extremes in stock price
movements distort the expectations of a large percentage of investors,
except for those who are able to look beyond the short-term.
"Managing expectations" is designed to demonstrate what
you can realistically expect from holding stocks and provide you
with a plan for dealing with market volatility. You don't
have to "beat the market" to do well in stocks. Success
comes with persistence and the ability to harness your emotions
when volatility strikes. Winning with stocks requires only patience,
not foresight.
