What a difference a year can make. In 2013, the Dow Jones Industrial Average (^DJI -0.45%) closed up 26.5%, while the S&P 500 (^GSPC -0.16%) ended the year higher by 29.6% and the Nasdaq recorded a 38.32% gain. But after just one month in 2014, all three indexes are down: 5.29% for the Dow, 3.55% for the S&P 500, and 1.74% for the Nasdaq.
Why have investors changed their tunes so dramatically in the past month? Heading into 2014, we heard one analyst after another saying why 2014 would be another big year for the markets. But now those opinions seem to be changing, and investors are nervous that a larger pullback is coming. On Wednesday, I even heard rumblings that some market participants thought the market was about to crash, because of some investors' concerns about what the Federal Reserve was going to do.
This kind of behavior tells me that the fear of losing money is greater than the satisfaction in making it.
In 2008, when the markets were tanking and the Dow lost 34% in one year, investors, politicians, pundits, everyone acted as if the world was coming to an end. There were investigations into why the markets fell, policies were changed to help boost the economy, and fear ran rampant that even more market value would be lost.
Flash forward to 2013: The Dow gains 26.5%, but there weren't any parades or the declaration of a national holiday, or anything else you'd consider the extreme equivalent of the overreaction to the 2008 market plunge.
Why do we act differently to gains and losses? Problem gamblers may give us some answers.
Some psychologists believe that problem gamblers actually like losing money more than they like winning it. The belief goes that these gamblers get more of an adrenaline rush from a sense of losing control, which excites them when they're losing. The thrill of winning money, in contrast, is much milder.
These findings are just theories, but they may give investors better insight into why they feel the way they do when the stock market falls. It may also help them pause and carefully re-evaluate their choices when they find themselves in such as overly excited state.
Many of the greatest investors have repeatedly noted that while investing takes some amount of skill and knowledge, being able to control one's emotions is even more important. And finding that control may be easier than many investors might think. All it takes is the proper perspective.
Here's what I mean. When the markets are soaring, it's hard to find good companies at a fair valuation. But when the markets are falling, finding good companies on the cheap becomes much easier, as all the good stocks start to fall within your reach. So if you think about a market pullback as a good thing, since you can get a bargain on stocks, then a falling Dow may not seem like such a bad thing anymore.
You won't find yourself tempted to sell in a panic. Instead, you might even feel like throwing a parade or declaring a holiday.