While the capacity to fear is basic human nature, specific fears are learned. Psychological studies going as far back as the 1920s show people can be taught to fear almost anything.Take for example John B. Watson's Little Albert experiment.
Watson is the esteemed American psychologist who established the psychological school of behaviorism. And his controversial Little Albert experiment is now featured in introductory psychology textbooks everywhere.
In this study, an eleven-month old boy was conditioned in a laboratory to fear a white rat. Every time Little Albert touched the rat, Watson would smash a steel bar with a hammer. The loud noise caused the boy to cry and show fear. After several repetitions of this process, Little Albert began to associate the rat with the loud, scary noise. Until finally, when presented with just the rat, Little Albert cried, turned away, and tried to get away from the rat.
Now this study has been roundly criticized as unethical due to Little Albert's young age. But the study clearly shows human beings can be conditioned to fear anything.
Here's my point...
A generation of investors have been conditioned to fear the stock market. And as a result, they're missing out on the opportunity to build enough wealth to support themselves in retirement. It all started with the bursting of the stock market bubble in 2000. Wealth accumulated over many years seemed to disappear in the blink of an eye. This was a hauntingly traumatic experience for everybody. And as a result, many investors swore they would never buy a share of stock ever again. Of course, after a couple of years, the market bottomed and began to recover. It was the beginning of what would become a five-year bull market for stocks.
But as usual, professional investors led the way. They know the best time to get into stocks is when the economic outlook is bleak. Most individual investors re-entered the market only after it began making new highs in 2006. I'm sure some of them enjoyed a year or two of nice gains. But it wouldn't be long before disaster struck again. Just a short eight years after the last meltdown, the financial crisis hit investors right between the eyes.
This time around though, it wasn't just stocks that suffered. The most important asset of all, our homes, plunged by amounts that defied even the wildest imaginations. Investor fear shot up to a level not seen since Great Depression days. And now history is repeating itself...
The market bottomed in March 2009 and began to recover. Professional investors led the way by getting back in while the economic outlook was still horrible. And stocks have made a historic, nearly uninterrupted two-year bull market run. Once again, individual investors have missed out on the last two years' worth of huge stock market gains. The stock market has become the individual investor's white rat.
Rather than face their fears head on and get back into stocks, they've mostly stayed in cash. And that's exactly where you don't want to be when interest rates are nearly zero. If you find yourself in this predicament, don't be too hard on yourself. As Little Albert proved, fear is a learned response. Instead, focus all of your energy on overcoming your fear of the market.
It's looking more and more like we're going to get a market correction.
The major stock market indices are all approaching pre-financial crisis highs. Unrest in the Middle East is spurring fears of skyrocketing oil prices. And a number of important companies have posted disappointing earnings. I don't think you could find clearer signs the market's headed for a round of profit taking.But don't despair. A little correction offers just the opportunity you've been looking for. A chance to get into good quality stocks at discounted prices.
Get mentally prepared to buy the dip. Do your research and find a few stocks or stock-based ETFs. And when the opportunity comes, don't let your fear of the market prevent you from building wealth you desperately need.
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