A week ago, we woke-up on a Monday morning to find the stock market in a massive downward spiral, falling more than 1,000 points within minutes of the opening bell. It was the worst start since the financial crisis in 2008, bringing back many bad memories and investor fears. The media was filled with doom and gloom stories as we began to mentally prepare ourselves for the worst.
Like you, I’m am investor too. I am not immune to fear or panic, nor do I enjoy seeing my portfolio lose money. Market volatility, especially extreme swings, are stressful AND a normal, natural occurrence. There are underlying causes that create market volatility and we cannot control how the market responds as a whole. However, what we can control is our response. And it is often our response that determines whom will be victors and losers.
Dubbed Black Monday by the media, the Dow Jones industrial average reached its lowest level in more than a year. While the Dow fell more than 1,000 points at the start of the day, the losses leveled throughout the day and eventually closed down 588 points. Investors held their breath, worrying about what tomorrow and the following days and weeks would bring. On the minds of many was what caused this downturn.
The simple explanation is there has been much fear about the slowdown in China’s economy and the possibility that it may be worse than predicted led to severe swings in global stock markets and finally our own.
What I want to make clear to you is that the stock market is always going to experience market volatility. Sometimes it is relatively mild and may even go unnoticed by you and the media. Other times, it is a spine-tingling roller coaster drop that leaves everyone feeling shaky and fearful. The underlying cause of extreme market volatility will likely differ in each instance, but what really matters most is your response.
Disclosure: These strategies may not be relevant to your personal situation and should be discussed with your CPA and financial advisor prior to implementation.
Whenever the market is experiencing extreme volatility, we hear prognasticators shout, “The sky is falling” and create panic. These stories are sexy and bring readers and viewers to all the various 24/7 news channels and websites. Fear makes people pay attention. Too often they pay attention to all the wrong things and forget that market volatility also creates opportunity, if you look for them.
We are all familiar with the well-known investment adage, “buy low and sell high”. Yet, many investors struggle to follow that advice. We tend to do the exact opposite, in fact. When markets experience such a big sell-off, even healthy companies are affected and trade at “discount” prices. You shouldn’t make rash decisions, of course, but now is a great time to do your homework and see if some of those companies that were out-of-reach prior, may now be ripe for the picking and are a good match to your goals, risk tolerance and time horizon.
It may seem counterintuitive since you’re likely see loss in your portfolio. The thought of investing more money and seeing it disappear seems masochistic. Who would do that to themselves? A long-term investor who is again willing to buy low and accept some loss now to watch it grow when the markets go back up. Remember the market is cyclical. It goes up; it goes down.
I admit that while I don’t like market pull backs, I don’t hate them either. There is opportunity to mine, including creating Long Term Capital losses that you carry forward to the years where you have capital gains. I go into more detail about harvesting tax losses in my post on creating a tax-efficient portfolio.
Market volatility reminds people to review their portfolio, but it doesn’t mean that you have to make changes, unless your goals have changed and your current portfolio is no longer in alignment with what you want your money to do for you. Many people tend to choose investments and forget about them, which can also mean their portfolios need rebalancing. Just be mindful that you don’t let today’s current market volatility dictate how you build or adjust your portfolio. Your goals, risk tolerance and time horizon should determine which investments are right for you.
Don’t panic and make emotional decisions. I understand this is scary and nerve-wracking. Every instinct may be shouting “Sell! Sell! Sell!” but I encourage you to instead take a deep breath and a step back. To give yourself some perspective. So when and if you need to make changes to your portfolio, you are not making an emotional decision or a knee-jerk reaction that you might regret later, but one that truly supports your goals and long-term financial well-being.
What To Do Instead of Worrying:
Now you feel more in control, which alleviates much fear and puts you back in the driver’s seat.
The markets will always have bad days and good days. We may love the good days more than the bad days, but as long as we remain emotionally competent, we increase our changes of being one of the victors in the long run.
How do you stay calm during market volatility?
Shannon
SHANNON RYAN, CFP®
I like to focus only on the things that I can control. I'm comfortable with our investing strategy and where our money is going - so I'm just going to let it ride for another 4 decades (something will change, but you get the point :))
A really good investing strategy is to cut your cable. Media made us afraid of shark attacks. Now they're doing their best to make us afraid of investing.
I've learned from experience the market goes through these gyrations and if I keep my head I'll end up better on the other side of it.