Is this the beginning of a crash?

It certainly could be, but the odds do not favor it. Statistically speaking, it is far more likely that a run-of-the-mill correction is now underway and working its way through each sector of the market, to varying degrees of severity. Counter-trend rallies are sharp and short (think Wednesday), which is fairly characteristic of a defined downtrend. The 200-day moving average is rising up just beneath us and it may offer some solid support, just as it had in December of 2012.

But you’ll be forgiven for panicking. As human beings, we all suffer from the same cognitive biases more or less. Being aware of that fact may help a little. Here’s Cass Sunstein writing at Bloomberg View talking about how 2011 felt like another 2008 for him, thanks to three key biases :

Availability bias isn’t exactly irrational, but it can produce big mistakes. The stock market did collapse in 2008, but it doesn’t collapse very often, and in 2011 I shouldn’t have focused on the risk of another meltdown.

The second mistake involves “loss aversion.” People tend to hate losses from the status quo – in fact, they hate them far more than they like equivalent gains. If you suddenly lose $10,000, the distress you would feel would almost certainly be greater than the joy you would feel if you suddenly gained $10,000.

The irony is that if we make our decisions on the basis of loss aversion, we’ll end up as big losers. A case in point: As the stock market started to fall, I wanted to prevent losses, and as a result, I lost a lot.

The third bias is called “probability neglect.” Human beings tend to focus on worst-case scenarios, especially when their emotions are running high, and not on the likelihood that such scenarios will actually come about.

You know my number one rule for market corrections: ABC – always be cool. 

Not every sell-off is 1929 or 2008. There’ve been 27 corrections since World War II for US stocks in which the market sold off between 10 and 20%. There’ve been only 11 instances in which stocks dropped by more than 35 percent. That’s almost a three-to-one probability that this doesn’t snowball into catastrophe.

Do your best to ignore the most hyperbolic commentary this weekend. The “Ministers Without Portfolio” – bloggers, newsletter assholes, etc – will be out in force with their prognostications. Most of them are secretly in passive index funds with their own money and only make their bold calls in the public eye to earn a living. They do not manage money because if they did, they’d never make anyone a dime. Their hysteria will not be helpful, even if this is one of the rare occasions when the broken clock is accidentally right.

Lastly, if your portfolio feels like its bleeding you to death, you’re probably more concentrated than you think.


Why Do Investors Make Bad Choices (BloombergView)

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here:

Please see disclosures here.

What's been said:

Discussions found on the web
  1. commented on Sep 17

    … [Trackback]

    […] Find More on that Topic: […]

  2. Immediate Edge Review commented on Sep 22

    … [Trackback]

    […] Find More Information here on that Topic: […]

  3. bitcoin loophole reviews commented on Sep 28

    … [Trackback]

    […] Info to that Topic: […]

  4. cibc online sign in commented on Nov 10

    … [Trackback]

    […] Info to that Topic: […]

  5. PG SLOT commented on Nov 25

    … [Trackback]

    […] Info on that Topic: […]

  6. visit site commented on Nov 25

    … [Trackback]

    […] Information to that Topic: […]

  7. check us out commented on Nov 27

    … [Trackback]

    […] Here you will find 26710 more Info on that Topic: […]

  8. td easyweb online commented on Dec 04

    … [Trackback]

    […] Find More here to that Topic: […]

  9. fake technomarine watch bands commented on Dec 08

    … [Trackback]

    […] Read More Info here on that Topic: […]

  10. 토렌트사이트 추천 commented on Dec 19

    … [Trackback]

    […] Here you will find 8663 additional Info to that Topic: […]

  11. Software testing company commented on Jan 11

    … [Trackback]

    […] Find More Info here to that Topic: […]

  12. Digital transformation commented on Jan 16

    … [Trackback]

    […] Here you will find 47970 more Info on that Topic: […]

  13. Tryten iPad Kiosk manuals commented on Jan 21

    … [Trackback]

    […] Information on that Topic: […]