Stock prices reflect investors’ expectations about the future earnings and risk of the companies they invest in. When expectations or risk change, due to something like nonsensical sweeping tariffs, stock prices can change, and they can change quickly and dramatically.
Falling stock prices do not mean that the market is broken or that the world is ending; they are expected from time to time, and their inevitability should be built into every investment plan.
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Market Crashes (2025 Edition)
Ben Felix discusses the nature of market crashes, emphasizing that they are a normal part of investing and should be anticipated by investors. He explains the historical resilience of stock markets, the impact of emotional narratives during downturns, and encourages investors to review their risk tolerance and financial plans.
Key Points
Market Crashes are Normal
Market crashes, while unsettling, are a typical part of investing, reflecting changes in expectations and risks associated with stocks. Historical data indicates that stock market declines occur frequently, and investors should anticipate them as part of their investment strategy.
Historical Resilience of Markets
Despite the volatility associated with stock markets, they have shown resilience over the long term, typically rebounding after crashes. Felix highlights a long history of positive returns from global stocks, suggesting that investors should maintain perspective on their investments.
The Power of Narratives
Felix explains how narratives influence investor behavior, often leading to anxiety and hasty decisions during market downturns. He cites research showing that narratives, distinct from data, can change how investors perceive facts and react, leading to misguided investment choices.
Understanding Risk Tolerance
Market crashes provide a critical opportunity for investors to assess their risk tolerance. Felix suggests evaluating emotional responses to market drops to determine if one's asset allocation aligns with their risk comfort level, emphasizing the need for a financial plan that withstands volatility.
Long-Term Investment Strategy
Felix warns against reacting impulsively to market declines and underscores the importance of sticking to a well-constructed investment plan. He encourages maintaining a risk-appropriate portfolio to manage potential downturns, reinforcing that panic selling can sabotage long-term investment returns.