2015 was a poor year for stocks. The S&P 500 Index (with reinvested dividends) increased only 1.4%. The beginning of 2016 has been worse. The S&P has declined approximately 7.5% year to date. Small cap stocks were worse in both periods.
Both stocks and bonds fluctuate in value; we call that volatility. No one worries when prices fluctuate up. But when prices suddenly fluctuate down, it is felt to be a surprising and painful event.
According to Jason Zweig at the Wall Street Journal
, a sudden, unexpected decline in our investments can set off alarm bells in the brain that cause “specialized cells in a region of the brain called the anterior cingulate cortex… [to]respond… firing out warning signals to other parts of your brain that control your pulse, blood pressure and stress hormones — putting your body on almost instant alert.”
Instant alert as in: We worry. We stress. We want to do something. Many investors sell in a panic.