I wrote up an article for RealMoney that drew a lot of what I would characterize as emotional responses. We have had a couple of clients have emotional responses to the current market volatility and some emotional comments on the blog.

A big picture way of thinking of this is that we have had a bad month. There might be more bad months to deal with or not but that is what we have had. I went to page 155 of the 2007 Stock Trader’s Almanac, the one with month by month changes in the S&P 500 going back to 1950, and I counted 53 bad months with a bad month defined as a 5% drop or more. So almost one a year. The one a year is less common than the 2-3 per year every few years and there were a couple of instances where there were more than three in a year.

So 53 times in 56 1/2 years (it only goes half way through 2006) means, to me, that this is very very normal. Emotional responses to very very normal will likely result in a bad decision.

This is what behavioral finance is all about, emotional responses to financial events where emotion is the last thing you need. There have been white papers and the like on this subject.

How many of the 53 bad months have you endured in your investing career so far? How many more do you think you will endure in the future. Now replace bear market with bad month in that last sentence.

I prattle on about having something in place to try to take defensive action if a bear market looks like it is coming. The entire point is to remove emotion from the equation. Look at a long term chart. If you first invested 20 years ago to the day (so right before the crash) with a long term time horizon and literally never sold anything (assumes index funds) you have endured wars, bubbles, terror, various financial crises and you have made a fortune–way ahead of inflation.

So if you can actually smooth out your ride all the better, but it isn’t even necessary for success.

I can think of no reason why the next 20 years should be any different so worrying about a bad month becomes incredibly unproductive and depending on the person even physically harmful.

Last 5 posts by Roger Nusbaum

• The Big Picture for the Week of November 15, 2009 - November 14th, 2009
• Process Drilldown - October 23rd, 2009
• Sunday Morning Coffee 10-18-09 - October 18th, 2009
• A Little Followup From This Morning - October 8th, 2009
• Wednesday Roundup - October 7th, 2009