Here we go again with another round of market volatility sparking fear in investorsโ hearts. But if we were to suggest one way to manage the volatility stress, itโs this: Be lazy.
During market volatility, our decision-making biases often get the better of us, prompting us to make impulsive choices that could have a lasting negative impact on our finances.
We may fall prey toย recency biasย and believe that an 8% drop in our portfolio means that it will continue to drop. Market volatility can also spawnย herding behavior, leading investors to blindly following others as they collectively panic and sell.
We canโt eliminate these types of biases, but we can use time-tested techniques to prevent them from affecting our decisions. One of the easiestโand often bestโthings to do is โฆ nothing at all.
With that in mind, here are a few tips we suggest for managing the current market volatility.
Tip Number One: Be Lazy
Market turmoil is unsettling. But if history has taught us anything, itโs that market volatility is an inherent part of investing and doesnโt matter tooย much for long-term investors.
Provided your portfolioโs asset mix is still a good fit for your time horizon and financial goals, youโre likely better off ignoring the short-term fluctuations. We know thatโs hard to do amid news articles featuring fear-inducing phrases like โWall Street bloodbathโ and โ$1 trillion wipeout.โ So why not take a break from the constant market updates?
While it can be important to stay connected and up-to-date on world news, constant monitoring of media feeds (especially market fluctuations) can trigger behavioral biases that hurt more than they help. There is a line between being an informed investor and obsessing over market movementsโand during market volatility, this line can become increasingly difficult to identify.
So, try setting up a regular schedule for how often you check your portfolio or even look over market news. Also, try limiting your news feed to trusted, well-balanced information sourcesโsuch asย those that explainย that a 1,000-point drop in the Dow is really only 2.5%.
Tip Number Two: Focus on Your Long-Term Goals
If you feel anxious about your finances and the market movements, take a break and consider your long-term financial goals. Reacquaint yourself with what youโre working toward, why you are saving, who inspired you to set those goals, and how you plan to reach them.
Consider this: Is your financial goal to beat the market? Or is it to have a comfortable retirement, buy a lake house in a few years, or save for your childโs college?
For many investors who have already tailored their financial plans (and attention) to their long-term goals, short-term fluctuations may not beย too big of a concern. When examining the performance of your portfolio, keep your long-term goals in mind and not the day-to-day ups and downs of the market.
Adopting a long-term focus is not natural (nor easy with news cycles measured in hours), but you can useย our three-step processย to slow down and recommit to your goals.
Tip Number Three: If You Need to Take Action, Take Thoughtful Action
Itโs hard to stay calm and wait out the storm when your portfolio is losing valueโwe all have aย tendency toward action. If you canโt suppress that urge to take action, try redirecting it.
For example, instead of trying to identify investments youโre going to sell, spend your energy making sure yourย financial planย is on track to meet your goals. Thisย could involveย ensuring that your portfolio is well-diversified or checking that your emergency savings fund is sufficient.
Or, if aย scarcity mindsetย is getting the better of you, it may be a good time to do a budget audit and cut down on any unnecessary expenses. If all else fails, reach out to someone you trust who can serve as a steady, guiding hand through this bout of volatility. This could be aย professional financial advisorย or a levelheaded loved one.
During Volatility, Our Own Behaviors Are Our Worst Enemy
We all know market volatility is a natural occurrence that will pass (as it always does), but the emotions we feel during it can be even more dangerous than market movements themselves.
When stress and anxiety are high (and contagious), itโs easy to give in to our biases and let them cloud our better judgment. Benjamin Graham warned about this many market cycles ago: โThe investorโs chief problemโand even his worst enemyโis likely to be himself.โ
But we can use lessons from behavioral science to prevent biases from derailing financial plans. We can make it easier for people to make the right decisions when it counts, sidestep biases when possible, and stay focused on our long-term goals. Sometimes that means evaluating the evidence, thinking carefully โฆ and then doing nothing.
Menu
