Massive share value drops take a human toll. To give an example, the $140 billion dip in General Electric stock price during 2017 made near paupers of many pensioners. The plunge has affected most of all whose retirement assets are in the form of GE stocks. It is thus important to avoid such fates in the future.
Surviving a disaster
A prominent media house pointed out that the loss of GE stock value during the last one year is twice the sum of money which vanished with the collapse of Enron Corporation in 2001. The sum is also more than the combined market capitalization which was deleted by General Motors and Lehman Brothers' bankruptcies at the time of the financial crisis. When calculated for the longer term, the market capitalization of GE has dropped by $460 billion from its 2000 peak. These events are fairly regular. They will be repeated over time. Multiple forces keep driving such errors. It is vital to comprehend them for economic survival.
Survivorship bias is a problem which every stock investor will face in a lifetime. This is described as the natural tendency to examine the outside world on the basis of what we see with our own eyes. Such a viewpoint leads to an abnormal view of how stocks will behave in the long run. An excellent example is the lost and found share certificate. Shares bought for $500 were rediscovered, after being forgotten, years later. They were then valued at $20,000. This was the case of many who purchased bitcoins. This logic was followed by people who invested their savings on GE stock. This may not always be the case. To give an example, shares of Enron are now not worth the paper they were printed on.
Diversification is vital. People do not comprehend the value of diversified portfolios. Many believe in the lottery mentality of putting all money in stocks of companies that they believe would be the next Apple or Google. A substantial number believes going for diversification may lead to losing a potential fortune. Similarly, the converse of higher returns is lower returns. Investing does not always mean higher returns. It also means lower returns. There could be even losses. It is good to understand that lower returns are more probable than previously estimated. One should also make a good financial plan. It is a better idea to understand the odds and act accordingly.