Don't Let a Discouraging Market Cause You to Forget What You Have Learned from Experience

As of this writing in mid-January, it's safe to say it's been a brutal beginning to the new year. The stock market has fallen 10% in just three weeks. It's now down more than 16% from its October high. The small-company segment, as measured by the Russell 2000, is down more than 21% from its 2007 high, enough to qualify as a bear market in small-caps. As Mark points out in Upgrading Winning Streak Now at Nine Years and Counting , our Fund Upgrading strategy has done significantly better than the overall market for almost a decade, but that doesn't mean distressing losses don't occur from time to time. These setbacks can be demoralizing.

I'm right in the trenches with you. I invest the majority of my own retirement money in the same strategies and funds I recommend to you, so I've seen my accounts drop in value as well (see Not Sure What the Experts Are Up To, but Here's What I'm Doing in 2008). Yet, I remain optimistic. If you're finding it hard to stay positive these days, let me share what encourages and comforts me in the midst of all this uncertainty.

• I know that following God's principles will protect me. A basic premise of SMI's philosophy is that it's ultimately impossible to self-destruct financially if our decision-making is pointed in the direction of God's glory (see A Biblical Blueprint for Financial Stability and Growth bonus report ). That means Susie and I have set financial priorities that are honoring toward God, including an acceleration in our giving. We don't have as much to fear from economic storms if we've laid a strong financial foundation—being debt-free, have an emergency reserve, and are living on a budget that produces a monthly surplus.

• I know that the U.S. economy remains, still, the strongest in the world and stock prices will eventually rise with it. Every down market is followed by an up market. It's surprising how easy it is to lose sight of this self-evident truth. We can get caught up in the market's emotional cycle where, in the midst of sudden and severe selloffs, mental depression sets in. Positives are overlooked. There is a growing feeling that the old rules no longer apply and we can't count on the market ever being strong again. But this is a trap. History has repeatedly shown that profit opportunities are greatest when the outlook seems bleakest.

• I know that the strategies I'm using have been tested and proven effective. My successes in the past have not been based on any ability to anticipate future events. Rather, they have been the result of following mechanical, trend-following guidelines that keep me diversified among those investment managers who are doing the best job at the present time. As long as there are markets, there will be trends. It's true that sometimes a trend is short lived, and just as we align ourselves with it, the trend weakens or even reverses, leaving us with a loss. This is to be expected. The trick is to not let this short-term setback discourage you from faithfully adjusting matters in order to follow the new trend. This flexibility has worked wonderfully well in the past, and I have every confidence it will work wonderfully well in the future.

• I know that my patience will be rewarded. This allows me to take up-and-down market cycles in stride. We must take our lead from the Parable of the Talents where the master was away for "a long time" and make our strategy a long-term one that aspires to get-rich-slowly. Legendary investor Sir John Templeton emphasizes that time is the enemy of the speculator, but the friend of the investor: "It is the passage of time that gives most approaches to the stock market the chance to work. I'm not talking about weeks or months, but years. Most of us, by nature, are results-oriented. Without performance, we lose interest. As such, lack of patience is probably the single greatest impediment to success in the stock market. Remember, success in the market takes time."

So, what do I do while I'm waiting? I practice "inside-out" thinking where my decisions are guided by my personal goals rather than external events. And most importantly, every day I take advantage of His grand and loving invitation to "approach the throne of grace with confidence, so that we may receive mercy and find grace to help us in our time of need." (Hebrews 4:16)

Austin Pryor is the founder and publisher of the Sound Mind Investing newsletter and website. His desire is to help people understand and apply Biblically-based principles for making spending and investing decisions, ultimately helping them have more so they can give more.

• SMI Editorials page
• SMI's Investing Principles page
• The High Cost of Fear 
• Make Sure Your Investment Decision-Making is Inside Out
• How to Take Market Turbulence in Stride
• How to Make Rational Investing Decisions 

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