We all know the story of Chicken
Little. She’s hit on the head by an acorn and immediately thinks the sky
is falling. She proceeds to warn the entire barnyard before, in their
haste to warn the king, they’re lured into a fox’s den. One version, the
more child-friendly version, has Chicken Little and her friends escaping
the fox and going on their way, having learned a lesson. It’s a story
about the folly of overreacting.
When it comes to overreacting,
Americans have fine tuned it into an art. It doesn’t take much these
days to send us all into an absolute frenzy over the possibility of
attacks or epidemics or disasters. Some reaction is appropriate. After
all, attacks and epidemics and disasters do happen. However, our first
instinct and impulse is to latch on to the worst case scenario and make
it personal. “Since fear is an emotion, we immediately overreact and
personalize things,” says Dr. Marc Siegel, author of False Alarm: The
Truth about the Epidemic of Fear. “We think things are going to
happen to us just because they’re scary.”
In all fairness, our reactions are
significantly influenced by what we’re fed through the media. The media
makes money when it sells papers or attracts readers and nothing does
that quite like sensational news. In addition, in the hurry to be the
first with breaking news, media outlets are constantly trying to one-up
each other, being the first to break some shocking statistic or
scandalous sound bite. So who can blame anyone for thinking the sky is
falling?
In time, the situation simmers down
and the true facts begin to emerge. However, by then, a dam has broken
or suspicious package been found and it’s on to the next headline. Let’s
take one recent example. Once Hurricane Katrina led to breaks in the
levees surrounding New Orleans, reports of the damage and long-term
effects began. With each new account, the seriousness of the problem
escalated. Now, yes, the problem was and continues to be very serious.
However, early estimates proved to be, as they often do, grossly
inaccurate.
While there are a number of problems
associated with our panic problem, one of the most detrimental, at least
from a financial standpoint, is the impulse to take cover with our money
in tow. It’s often during tragedies that investors pull their money out
of the market, thinking they can protect it better than our free market
system. This presumably calms their nerves and enables them to avoid the
declining stock market. However, this safety is only an illusion, not a
reality.
In times of tragedy, however, the
market is still the best place to have your money. Why? Because you have
no way to determine with any certainty whatsoever whether it will have a
positive or negative impact on your portfolio. In the case of Katrina,
who among us did not expect a very negative impact on the stock market
following this tragedy, and what happened? Within three weeks, the Dow
Jones Industrial Average was up 2.18% and the S&P 500 gained 2.45%. Go
figure.
Another less
pleasant version of the Chicken Little story has the animals going into
the foxes den, never to come back out. While grim, it’s the sad reality
for most investors. Getting out of the market is a mistake, but it’s one
that can be corrected. The worst mistake is never getting back in.
