Why is investing in down markets so difficult?

Since profiting in a down market requires the investor to move money into new strategies prior to the top, one must be willing to "lose money" in the prior cycle. This can be costly due to the lack of fortitude and impatience of the investor. If the movement of money to the new strategy pays off quickly, the investor is satisfied that they made the right decision. If the change produces immediate losses, the investor begins to question their decision. The longer the wait, the harder the emotional pull to punt the new strategy and go back to prior investments. Only through reviewing the skill of the manager, based on his strategy, and accessing whether the environment for that strategy is or will be in place, can an investor determine the need to fire a manager and move on. The easiest and most common response is to react emotionally which inevitably proves to be the most costly response in the long run. The hardest move, that has proven to be the most rewarding for investors over time, is to thoroughly research the skill and environment variables and act accordingly.

As humans, we know that bear markets bring more than investment losses. Emotionally, we are more comfortable believing that the "good ole days" can go on forever. Most of us tend to procrastinate. Additionally, in bull markets, investors come to believe that substantial losses cannot occur. The longer the bull market goes, the more likely are investors to experience minimal losses. Thus, investors conclude they are in a safe and low risk environment. From the perspective of 300 years of market history, this easy money environment is actually a sign of a market top.

So the main reason making money in a down market is so difficult, is that one must go against the crowd. This takes courage and in order to overcome one's own emotions, must be fortified by ongoing research. Eventually, we learn to rely on logic, rather than emotion, to make decisions on how and where to invest. Do not be fooled. As humans, we tend to underestimate our emotional responses to stressful situations prior to entering them. This is difficult to learn, though not impossible. Otherwise there would be no great investors.

It does, however, require more than knowledge. It also requires hiring the right type of managers who have the skills and tools needed to profit from a decline. The more you read and develop your own level of understanding, the more confidence you will have in your investment decisions.