Insecurity. We’ve heard that word a lot in recent years. However, we have also seen that resilience has manifested itself in almost every period of uncertainty. Change is a constant part of our daily lives.
Some argue that this is the only thing we can accurately predict. In my more than thirty years of experience in asset management, I have seen market volatility come and go – and that is to be expected.
The cycles are familiar: the economy grows and contracts and the markets rise and fall, and often our emotions get caught up in the waves of change.
According to Schwab, market cycles vary in length. They shared:
“A bull market is a long-term upward trend characterized by optimism and a robust economy. In contrast, a bear market is a prolonged downtrend, usually characterized by declines of 20% from recent highs, accompanied by widespread negative sentiment. The record bull run in US stocks, which began in early 2009 and ended in March 2020, is a recent example of a long-term market cycle.
Long-term cycles can also include several shorter cycles. For example, within a long-term cycle there may be short-term sell-offs that do not culminate in bear markets or periods of largely sideways price movement. As illustrated in the chart below, investors can refer to a monthly chart of a benchmark such as the S&P 500® index (SPX) over the past twenty years to identify previous long-term market cycles.”
Over the years, from cycle to cycle, I have said to clients, friends, colleagues and beyond: be focused, not emotional. Learning to manage your emotions can make you a better investor because instead of making reactive choices, you can make intentional ones.
Here are 10 steps to manage the emotional flair that can occur when change takes hold. These steps can pave the way for good investment decisions while helping you maintain your overall well-being.
- Understand the need to evaluate your plan: Review your investment strategy based on your objectives, risk tolerance and time horizon. Review the guidelines you’ve established for how to respond to market fluctuations based on your individual scenario.
- Be on a need-to-know basis: Stay up to date with market news, but don’t let it dominate your thoughts. Strive for a balanced view by consuming information from reliable sources, without getting caught up in sensational headlines. Headlines sell, but they are often hype to get views and clicks.
- Practice mindfulness: Techniques such as deep breathing, meditation, or yoga can help you stay grounded and manage stress. Mindfulness can help you observe your emotions without letting them dictate your actions.
- Diversification: This can help limit risks while opening the doors of opportunity. Diversification can provide a cushion against market volatility, which can result in more stable total returns.
- Focus on long-term goals: Keep your long-term goals in mind to avoid making impulsive decisions based on short-term market movements. Reactive decisions rarely yield favorable results.
- Respond with intention and not impulse: A knee-jerk reaction often doesn’t take the whole picture into account. Instead, assess the situation from a 360-degree perspective and consider whether action is needed based on your strategy.
- Communicate with your advisor: Reach out to your trusted advisor to get an objective perspective on your investments and ensure your strategy still aligns with your goals.
- Manage expectations: Understand that market volatility is normal and that investing involves risk. Set realistic return expectations and be prepared for ups and downs. It’s all part of the process.
- Recognize your stress and address it: A healthy lifestyle supports emotional resilience. Taking the time to get a good workout, making sure you get enough quality sleep, and making nutritious food choices can keep you fueled during times of increased stress. Recognizing that you are under stress is the first step in preparing to handle it effectively.
- Reflect on past experiences: Think about how you have responded to market volatility in the past and whether those responses have been favorable. Learn from past experiences to improve your response in the future.
We may not have control over what happens to us in life, but we can always control how we respond to things. The key is to respond – not react. Reacting is an emotional reaction to a situation that is often impulsive and can be influenced by our past experiences or fears.
Responding is a thoughtful and deliberate action that considers the situation, weighs the options, and makes an intentional decision.
Incorporating these practices can help you better manage your emotions and make more rational decisions during periods of market volatility.