Wise choice of bread
For the past few weeks, I have closed my eyes before looking at my investments, and only looked through my fingers – as if I was facing Freddy Krueger, and not with a number of numbers. It doesn’t help that financial news headlines are full of daunting potential futures: possible recession, trade wars, and potential market corrections.
It’s enough to get me to withdraw all my money from my investment and put it in a safe place like my mattress.
But no matter how strong the market swings may be, I also know that getting my money out of the market is the worst thing I can do when my portfolio is on a downward trend. This is because the only way to ensure that instant losses become permanent is to sell.
It is, of course, much easier said than done, knowing that you should stay on course. If you want to cut your losses when you hear gloomy financial projections, it is especially important to learn how to stay cool. Here are some ways to stay calm when the market is scary.
Remember it’s okay to hide.
Hiding your head in the sand is a lot of trouble, but there are times when this is really the best course of action. This is because of the cognitive bias that prompts us to act in response to fear. It seems to us that doing something, even if it is counterproductive, is preferable to doing nothing. But listening for bias is the reason why people sell when the market is at its lowest and buy when it is at its highest. They are afraid to do nothing.
Because it’s almost impossible to overcome the voice in our head screaming at us, “Do something!” when the market falls, an easier way to overcome action bias is to simply ignore your portfolio.
Of course, this does not mean that you should never check your assets. However, constantly studying financial news and checking your portfolio every day will lead you to make decisions based on fear (or greed) instead of following your rational investment strategy.
Instead, plan to regularly check how your investments are doing – every month or every quarter. This will give you the information you need to balance your assets and make the necessary adjustments without falling prey to bias. (See Also: 5 Ways To Invest Like A Pro – No Financial Advisor Required)
Feel the comfort of history
While the phrase “past performance is not a guarantee of future performance” is almost tattooed on the forehead of every stock market analyst and financial planner, there is good reason to look at the past performance of the market as a whole. If you study long-term trends and overall historical returns, you will see that markets inevitably tend to rise.
Knowing that the market will rebound doesn’t make short-term losses and volatility more exciting to experience, but it is easier to put any instant losses you experience into context. Savvy investors who weren’t panicked by the 2000 and 2008 market adjustments have seen their portfolios recover over time. As stressful as any downturn is, having faith in a sound investment plan and long-term historical market trends can help you stay on course and make sure you and your money switch sides. (See also: How to Prepare Money for the Coming Recession)
Make a volatility plan
One of the reasons we tend to overreact to volatility is because we forget that it is a natural part of the financial markets. Market downturns are normal and we should expect to see some of them over our long investment careers. However, we often expect markets to only rally. With this anticipation, even a small drop can seem overwhelming.
A good way to counteract these expectations (and the resulting fears when they are not met) is to make a plan for what you will do during a recession.
Your volatility plan can be as simple as adopting your downturn preparedness strategy. Knowing ahead of time that you will reduce the number of reviews of your portfolio when things look bleak, you can stick to that plan.
Your plan can also be proactive rather than just reactive. Since you know that market downturns are normal and natural, decide in advance how you will take these fluctuations into account in your investment strategy. You may decide to buy more investments during a downturn instead of being afraid of it. (See also: 7 Easy Ways to Create a $ 0 Emergency Fund)
Do not panic
Human beings are not in the mood to be rational investors, which is why we tend to be so bad at it. Our emotions can take over our rational strategies, especially when we are afraid. But selling your investment due to market volatility and intimidating headlines is a permanent solution to a temporary problem.
Think about how to react to frightening market changes before they happen. Then you know you already have a plan to come back to and are less likely to react simply out of fear.
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