How to Invest Money Wisely in a Volatile Stock Market
Stocks go up and stocks go down – markets can and do change in the blink of an eye. While the world around us goes a little haywire and headlines swirl of political unrest, trade wars, and currency devaluations, traditional asset markets do a dance of their own – sometimes responding to events, other times ignoring them, still other times leading them. As the saying goes, “tough times don’t last – tough people do,” and this certainly holds true when markets suddenly turn volatile.
It is precisely when “gut-check” time arrives that we must remain cool if we are to remain active and effective in the markets – yet many investors lack the experience and perspective to use their heads and control their emotions when times get tough. So, how should one stay calm during difficult times of market volatility? Let’s take a closer look.
1. Have a Plan
Rule number one when investing is to have a plan and to always know why you have entered a particular position. Why did you buy this stock? What are you looking for to happen, and at what price are you looking to start (or finish) selling?
What fundamental event or events are you waiting on to happen that will help justify your purchase? What is your time frame for these events and for your desired price level?
What is your degree of certainty? What could happen negatively that would change your expectation of fundamental events or price performance in the stock? These are important questions that you should ask and answer prior to pulling the trigger on the investment, and you should in fact write them all down in a journal.
When we think through these questions and journal our answers, we are far less likely to become emotionally swayed by market gyrations when they do occur.
In fact, if our investment thesis remains sound when market turbulence suddenly hits, we can refer back to our journal entry and decide to add to our position if our conviction remains strong, given the opportunity that the unexpected market volatility now offers.
2. The Trend is Your Friend
“The trend is your friend” is a well-worn market cliche – but it became a cliche in the first place for a reason. When investing, it never makes a lot of sense to “fight the tape,” and it so happens that over the long-term (as in decades), the stock market consistently trends higher.
In essence, the more we zoom out, the better things look. While there’s little disputing that market corrections and crashes can be unsettling or even scary, there’s no disputing that when an investor manages a diversified portfolio reflective of the S&P 500 – or is simply focused on an S&P index fund – that time has historically come to the rescue.
Even when an investor bought prior to the three toughest investing periods of the past 45 years – the 1974 bear market, the October 1987 crash and the 2008-9 financial crisis (when the S&P lost half of its value in five months), it hasn’t mattered in the long-run. In fact, the S&P is up over 230% from it’s February 2009 level as of this writing – less than eleven years later!
3. Don't Panic
The trick, therefore is to avoid panic-selling. But how? Often times, when markets are dropping, the impulse is to do something – anything – sell a little, sell more – but do something! But therein lay the mistake. The bias toward taking action during times of market volatility is what hurts undisciplined investors.
However, if you have your written plan, things get easier – it becomes easier to buy more, or it becomes easier to do nothing at all! Just wait, wait it all out. Ideally, the money that you have in the market is not money that you need to live on, but is money that you can afford to keep in the market for a number of years.
That money is there to work for you – even when it can’t – when the market has gone temporarily crazy. Remember – markets can go crazy, but that doesn’t mean you have to, as well. And it helps to remind oneself of that – just because a market can get crazy doesn’t make you crazy and it doesn’t give you the permission to act crazy.
Keep a cool head, remember why you invested in the first place, and hold on for the long-term if that was part of your original thesis and none of the underlying fundamentals to your investment have changed. Remember – the trend is your friend and markets over the long-term have always historically rebounded.
4. Ostriches are Smart Investors
The expression, “Don’t bury your head,” often has a negative connotation, implying inaction in the face of dire surrounding events and consequences. However, when it comes to market volatility, burying one’s head isn’t always such a bad thing.
During the market-wide tumult that followed the .com bubble bursting of 2000, Warren Buffett was quoted as saying something to the effect that he would have made more money that year if he’d just gone to the movies every day. Similarly, the investment firm Fidelity once conducted a study to determine which of their investors did best over time and discovered that those customers who had forgotten that they had Fidelity accounts actually performed best!
Eye-opening as this may sound, the overriding point to take from these examples is that the impulse to do something is often wrong. Doing nothing in the face of adversity and ignoring the bias to take action when the sky appears to be falling can actually be the best choice.
Therefore, get into the habit of checking your portfolio regularly but less often (once a month/once a quarter), in this way you take your unrealized day-to-day/week-to-week gains and losses far less seriously and become better prepared to ignore greater market volatility when it does arrive.
This is how you condition yourself to avoid the panic-sell and remain poised to take advantage of buying opportunities when they do present themselves during periods of excessive market volatility.
About The Author: Steven Brachman
Steven Brachman is the lead content provider for UnitedSettlement.com. A graduate of the University of Michigan with a B.A. in Economics, Steven spent several years as a registered representative in the securities industry before moving on to equity research and trading. He is also an experienced test-prep professional and admissions consultant to aspiring graduate business school students. In his spare time, Steven enjoys writing, reading, travel, music and fantasy sports.
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