Wise choice of bread
For the last few weeks, I’ve been closing my eyes before looking at my investments and only looking through my fingers – as if I’m looking at Freddy Krueger and not a series of numbers. It doesn’t help that financial headlines are full of frightening potential futures: a possible recession, trade wars, and possible market corrections.
It’s enough to make me want to take all my money out of my investment and put it in a safe place like my mattress.
But no matter how strong the market fluctuations can be, I also know that getting my money out of the market is the worst thing I can do when my portfolio is trending down. This is because the only way to ensure that instant losses become permanent is to sell.
Of course, knowing that you must stay on course is much easier said than done. If you’re tempted to cut your losses when you hear bleak financial forecasts, it’s especially important to learn how to keep your cool. Here are some ways to stay calm when the market is scary.
Remember it’s okay to hide
Burying your head in the sand gets a lot of criticism, but there are times when it really is the best course of action. This is due to a cognitive bias that encourages us to act in response to fear. It seems to us that doing something, even if it is counterproductive, is preferable to sitting around doing nothing. But by listening for action bias, 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 suppress the voice in our heads screaming at us, “Do something!” when the market is down, the easiest way to overcome the propensity to act is to simply ignore your portfolio.
Of course, this does not mean that you should never check your assets. However, obsessive consumption of financial news and checking your portfolio daily will lead you to make decisions based on fear (or based on greed) instead of following your rational investment strategy.
Instead, plan to check in regularly on how your investments are doing—either monthly or quarterly. This will give you the information you need to balance your asset allocation and make the necessary changes without falling prey to action bias. (See also: 5 Ways to Invest Like a Pro – No Financial Adviser Required)
Take it easy in history
While the phrase “past performance is no 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 the markets inevitably move higher.
Knowing that the market will bounce back doesn’t make short-term losses and volatility more enjoyable to live with, but it does make it easier to put any momentary losses you experience in context. Savvy investors who didn’t panic over the market corrections of 2000 and 2008 have seen their portfolios bounce back over time. As stressful as any dip can be, trusting a solid investment plan and long-term historical market trends can help you stay on track and ensure you and your money make it to the other side. (See also: How to Prepare Money for the Coming Recession)
Plan your volatility
One of the reasons why we overreact to volatility is because we forget that it is a natural part of financial markets. Market downturns are normal, and we should expect to survive several of them over the course of an investor’s long career. However, we often expect markets to only rise. With such expectations, even a slight drop can seem overwhelming.
A good way to counteract these expectations (and the resulting fear of not being met) is to make a plan for what you will do during the downturn.
Your volatility plan can be as simple as adopting a head-in-the-sand strategy for downturns. Knowing in advance that you will cut back on your portfolio reviews when things look bleak, you can stick to this plan.
Your plan can also be proactive, not just reactive. Since you know that market downturns are normal and natural, decide in advance how you will account for these fluctuations in your investment strategy. You may decide to purchase more investments during a recession rather than be afraid of it. (See also: 7 Easy Ways to Start a $0 Reserve Fund)
Do not panic
Humans are not designed to be rational investors, which is why we are so bad at it. Our emotions can take over our rational strategies, especially when we are afraid. But selling your investments due to market volatility and scary headlines is a permanent solution to a temporary problem.
Think about how to respond to frightening market changes before they happen. Then you know that you already have a plan to fall back on and you are unlikely to react out of fear.
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