There’s something that is ruining investor’s returns – and it’s not Ebola.
It’s something like a virus that mutates over time, and it has been crushing people’s returns for years. I call it the “Perfection Misconception.”
There is a very common thought that there needs to be an “all clear” signal for the US economy, and around the world for that matter, before the stock market is a place you want to invest.
Its human nature and our DNA that wires us to wait until we know it’s safe before we proceed with anything perceived as risky. If I’m about to cross a river but I see that there are crocodiles swimming in the water, I’m going to sit and wait until I see them leave before putting my big toe in. This fear and the ability to know when we should wait or avoid danger is a primary reason that humans have been able to survive and evolve in the world.
While this wiring continues to be a key part in helping humankind flourish, it’s the complete opposite of what you need to do as an investor if you ever want to make money. In fact, if you wait until an “all clear” signal it’s typically a terrible time to get involved in the stock market. Unfortunately it’s more difficult than ever to ignore warning signs that say the stock market is dangerous. Between the 24-hour news channels and the hundreds of financial websites and newsletters, it is nearly impossible for us to read the news for an entire week, and come away saying, “Wow, according to the news, the world and the economy look like they’re in great shape.” This is namely because the news media loves to point out the biggest flaws or most significant problems impacting the world.
It is easy to fall into the misconception that the stock market is terrible place to be, unless everything in the economy and the world is perfect. And as we all know, perfection never comes. So investors fall into the trap of waiting until jobs look better (then I’ll invest), or housing looks stronger (then I’ll invest), or Vladimir Putin seems saner (and then I’ll invest), or markets are calmer etc. When in fact, the key is not to wait until everything looks “perfect.” As an investor, by the time all the crocs are out of the river, it will be too late to cross – or in this case, for you to make any money.
Another cause of the Perfection Misconception is that most people are grossly misinformed or mislead about what is really happening in the economy. A recent study by the Public Religion Research Institute shows that a whopping 72% of Americans still believe that we are in a recession. The United States actually got out of recession in 2009. That’s five years ago! While people have been have been waiting for the recession to end, the stock market has risen approximately 200%.
Complaints always get center stage in the news. I can’t remember a time when some group wasn’t complaining about how bad things are…the middle class is squeezed, wages are too low, taxes are too high, congress is dysfunctional, and the list goes on…which is why such a high percentage of Americans still think we’re in a recession. While all of these issues have some validity, they are not definitive indicators to be in, or out of the stock market.
Remember, regardless of how strong our economy is, it will never be celebrated or “perfect”. Next time you read a negative article about the economy, I challenge you to take a step back and remember the Perfection Misconception. I’ll be more nervous when people are actually trying to give the “all clear” signal.