Spooked by the Market? Keep Thinking Long Term!

It's okay to be scared. Don't let fear ruin your portfolio, though.

Fear is a perfectly human emotion. It's only natural to feel queasy when looking at your stock portfolio these days, as nearly every company this year has been taken behind the woodshed for a solid beating. But if you let your worries change the way you invest, your fear of the market will soon turn into chrematophobia-the fear of handling money at all.

Stock market success

Investors who let emotions rule their trades rarely keep a long-term focus. Despite their good intentions, they forget about investing in great businesses and reaping the benefits of their growth over the years. Instead, the stock market becomes a high-stakes poker table.

If you react to good news one day and bad the next, it's easy to get sucked into day trading. It's fast money and fast decisions, where every second counts and you always need a ticker tape by your side. Get lucky once or twice, and you feel invulnerable.  This feeling of invincibility may cause you to move on from trying to time trades in stocks you know well, to riskier bets on companies you've barely heard of. Then, perhaps, you'll consider stock options, which is a way to leverage your bets many times over and play a big game with limited capital. The more volatile the market gets, the bigger the gains from these leveraged bets.

Day trading failure

If this sounds too good to be true, it is.  Study upon study and anecdotal evidence add up to one simple conclusion: day trading can ruin you.

Remember Newton's third law of motion: For every action, there's an equal and opposite reaction. The same is true on Wall Street. For every great gain, there's a great loss. While options and volatile stocks can make you money, they can lose just as much, very quickly. That's why "long-term buy and hold" is the credo of most truly successful investors, from Warren Buffett to Benjamin Graham.

Don't feel too bad if you've already started down this road of day trading. You're not the first, and you won't be the last. Newton himself didn't apply his own third law to money management, and lost a massive fortune in a distant economic bubble. We don't know if he was a day trader, but he got swept up in a national mania instead of thinking through his investments.

Bottom line: Long term wins the race

Remember that the stock market is a popularity contest in the short term, but a weighing machine in the long run. Day-to-day and hour-to-hour moves may look exciting, but they're hard to predict with any kind of accuracy. Add them up, and you get a relatively smooth upward curve that spans years and decades. That's what you should be looking at.

Close that stock ticker window and forget about leverage, options, and the quick buck. Allow yourself to become a true investor again. It's the safe bet, even if it looks scary right now.