Dealing with Market Turbulence
Market turbulence have you feeling a little sick to your stomach? You’re not alone.
After a rather stormy couple of years, the NASDAQ has officially entered bear territory. For many, years of savings have lost value. This makes it feel like the perfect time to panic, sell everything and retreat until the boat rights itself.
After all, the market looks riskier than ever before.
However, as counterintuitive as it sounds, now is not the time to change your investing strategy.
In fact, now is the worst possible time to get out of the market. Instead, now is the time to stay the course, or if you’re in the right position, double down.
Mind your fears about investments
Everyone knows to buy low and sell high. That’s easy to say when your savings are safe and you’re feeling good in a bull market.
But what many people don’t realize is that piece of advice can be agonizing when a ‘low’ market comes around and it feels like you’re losing everything. Bear markets tend to breed pessimism, while those bull markets, when prices are high, breed optimism.
That’s why Warren Buffett said, ‘be fearful when others are greedy, and greedy when others are fearful.’
So, when everyone else is riding high on a stock market bubble and there doesn’t seem to be a single stock that’s dropping, investors should be careful. And when the market is dropping like a stone and everyone’s panicking (like right now), that’s when you should start investing.
But that feels scary, doesn’t it?
Invest to your risk comfort
We, as humans, make a lot of decisions based on our emotions. For some things, like when to settle down, where to go on vacation, or who to choose for a partner, that makes sense (though logic always has to have a role as well). But as we’ve seen, investing well is often about making decisions that are counter to your feelings in the moment.
There are a variety of ways to deal with this, including talking to your financial advisor when you’re starting to feel stressed about your investments, but the best way is to ensure your investments fall in line with your risk comfort.
If you are a risk-averse person, the cost on your mental health to ride out those downturns may not be worth the possibility of extra earnings. You may be better off taking a more conservative approach that will let you sleep easier at night knowing your investments are safer.
However, if you’re a thrill seeker, increasing your risk for higher potential investment income may be worth it.
Long-term always beats short-term
Whether you’re a high-risk person or are uncomfortable with the idea that you could lose $1,000 in a matter of months, the most important thing for investors is to focus on their long-term plan.
People often think the best way to make money in the market is to be constantly moving money around, trying to buy stocks they can turn around and sell for profit months or even days later.
That kind of movement, trying to find the exact right time to buy and sell in the short term, is called timing the market. And few can do it with any semblance of success.
In fact, even the best hedge fund managers don’t do a good job at timing the market. So unless you want more worry and stress, with little increase on your return on investment, the best you can do right now is to ride it out and stop trying to time the market. Stop looking at your investments if you need to, and keep following your plan until the market swings back up.
And it will.
The good news
While few can make an accurate guess as to what the market will do tomorrow, we can guess with much greater accuracy where the market will be in ten or twenty years, i.e. up.
How do we know? Because the S&P 500, which makes up 80% of the market’s value, has increased in value 40 years out of the last 50. That’s consistency.
And while this downturn may feel endless, the truth is it probably won’t last long.
In fact, since 1966, the average bear market has been about 15 months long and pulled the market down by 38%, according to a study by the Schwab Center for Financial Research. But, an average bull market lasts almost six years and adds about 210% to the market, according to the same study.
Based on those numbers, we can be reasonably sure that sometime in the not-so-distant future our investments will once again charge forwards with the bull market.
And, when the inevitable return does happen, the market comes back with a vengeance. According to a study by Charles Schwab, some of the biggest gains come early on in the market’s rebound. So, when investors pull out, they deprive themselves of those first days of hard-charging optimism. And, more importantly, they miss out on some of the greatest returns their portfolio will see.
And that’s why even though it feels scary, and the news is telling you to turtle up, there is an opportunity for those with a high tolerance for risk to make money by doubling down.
Of course, that’s not for everyone, and you should consult your financial advisor before making any big movements right now.
Whether you choose to stay the course or double down, we can benefit from this topsy-turvy market as long as we can…
Stay Calm and Invest On.