Tips For Coping With Market Volatility

 

Successfully coping with market volatility will help you to maximize the growth of your wealthThere are many reasons why coping is not easy. You have to overcome your own natural and normal fears, stress, and panic. You may also have to help your family members cope.

Successfully coping with market volatility will help you to maximize the growth of your wealth, so it is very important to cope as best you can.

We understand your concerns, your emotions, your stress, and the ways that you are likely to react to market downturns. Union Financial Partners is committed to providing peace-of-mind, which is why we regularly communicate our wisdom with our clients as well as provide advice and tips to cope with market volatility. We know that peace-of-mind will drive your behavior to maximize the growth of your wealth. We will help you to feel comfortable with your investment strategy so that you can let the efficient markets work for you with full confidence. Rather than miss salient unpredictable growth opportunities due to a flight-to-cash or other reactionary actions, your confidence and comfort will enable you to capture all gains.

There are numerous publications (including this website) describing how emotions and stress affect investor behavior, often with detrimental results. Many people intellectually know what they should do, but their emotions and stress cause them to do what they shouldn’t do. Individuals are often their own worst enemy by buying high then selling low because of emotional distress. When markets are volatile we help calm your fears, comfort you, and instill confidence by educating you with patience and care that:

  • Risk and volatility are ameliorated over time
  • Compounding contributes to the growth of wealth
  • Higher returns can be expected from lower prices
  • Investments in equities typically yield higher returns than bonds over time
  • When markets decline, there is greater risk, that often leads to a greater reward
  • In order to capture your reward, you must remain patient and remain invested
  • Attempts to time market entries and exits typically reduce portfolio growth versus maximize it


If you have stress or feel despondent about market volatility or macro economic conditions, do not hesitate to call us to discuss your situation and feelings. We also encourage you to subscribe to our blog, follow the “Tips For Coping With Market Volatility” presented here, and take advantage of other information that we provide to help you cope and stay on track to maximize the growth of your wealth and achieve your financial goals.

Tip 1: Anxiety And Panic Natural And Normal

Anxiety over market declines, macro economic conditions, and world events is common. It is natural and normal to be concerned about such events. You must however keep in mind that all historical analysis of markets shows gains over time, especially over long-term periods.

Financial losses, including perceived potential losses, are processed by our brains in the same ways as mortal danger. Most investors when facing adverse market conditions and hence a “danger” of losing money cannot overcome their “fight or flight” instinct, which is to save yourself from danger and to protect yourself and your family. When confronted with fear, people feel they must do something to save themselves from losing money, however the results of reactionary decisions are contradictory to their plan, their long-term goals, and the growth of their wealth. Your natural instinct to save yourself by selling your investments to prevent perceived losses (refer to tip #4) is in fact your own worst enemy in these situations. The tips presented here will help you to have a historical perspective (tip #3) and the understandings and confidence to calmly manage your investments with discipline.

Tip 2: Don’t Loose Sight Of Your Long-Term Goals

Excelling in sports and business requires focus. The same applies for investing. Focus on your financial goals and do not let market volatility become a distraction. If you have a plan that is sound and viable, then remain focused and stick with it. If you don’t have a plan, create one. Altering your course in response to market fluctuations and other reasons will only constrict the growth of your wealth or result in losses. The more you alter your course, the more likely you will sacrifice returns or sustain losses. Conversely, the more you stay on course, the more you are likely to capture the rewards that you deserve for the market volatility that you’ve endured and the investment risks you’ve taken (refer to the example below).

Tip 3: Volatility Will Always Exist

Embrace the simple fact that financial markets are volatile. However there is much evidence, including what we have provided on this web site, to substantiate that markets rise over long-term periods. Interspersed with steady long-term increases markets have and will continue to decline for periods of time. It can be difficult to remain calm and confident in your plan, strategy, and discipline during a (“bear market”) correction period. Do not let temporary conditions overwhelm you, overshadow history and research, and cause you to make decisions that can be less beneficial than staying the course. Monitor and make adjustments as necessary, but do not overreact. History and academic studies prove time and again that if you stay the course, you are best positioned to capture market gains.

Tip 4: Don’t Confuse Portfolio Value with Losses

A loss (or gain) is the result of a transaction and therefore an actual realized loss can only occur when you sell something for less than you paid for it. The value of a portfolio is dynamic, changing as the value of its components change. If your portfolio value is less than what you started with, then at that moment the portfolio is “under water”. But you have not actually realized any losses. If the timeframe over which you plan to hold your investments is long (i.e., ten years or more), then it is a good idea not to check the value of your portfolio daily, because mostly what you will get from daily checking is volatility-induced stress. Rather you should periodically monitor your investments for alignment with your goals; the appropriate frequency between quarterly and annually. Under water conditions makes most investors uneasy and causes them to abandon their planned investment strategy, after which the investor will either miss follow-on gains (refer to the example below) or will be executing to an inferior or unsuccessful impromptu strategy. We hope these tips and our counseling help you to not make this type of costly mistake.

Tip 5: Only Evaluate Performance Against Your Plan and Goals

Your investment strategy should have been created to achieve specific goals at specific future time frames, that is, in accordance with a plan. Your plan has specific timeframes. Don’t focus on what happened today. Even worse – don’t evaluate the performance of your portfolio using short-term or other artificial timeframes. Success or failure can therefore only be declared at those endpoints. By way of example – if you are 5 years into a 20 year plan, then you cannot evaluate or fairly judge the success or failure of your plan. It would be just as unreasonable and unfair to declare a sporting team victorious just because they have a lead (even a significant lead) at some interim period such as “half time”; victory can only be declared at the planned completion of the event! The performance of your investments should be measured and monitored with regard to your specific goals, so that if corrections to your investment strategy are indeed indicated, you have the necessary information to make appropriate adjustments.

Tip 6: Don’t Let Media Headlines Scare You Off Course

News and media can incite and exacerbate panic. News providers are businesses that intentionally use sensational (“if it bleeds, it leads”) headlines to sell their products. Sensational headlines such as the examples shown here are designed to get your attention and will of course cause you to panic, or worse – they will cause you to make costly decisions in reaction to their stories. Consider that on any given day it is possible to find someone quoted in the media that the financial markets will continue to rise, while another person is quoted as stating that a major market decline is imminent; both may offer compelling arguments, but which person is right? There is really no way to know for sure, which is why we advocate to not pay too much attention to information of this sort as well as “stock-pick-of-the-day” strategies and instead to implement diversified long-term, goal-based investment strategies that include bonds that have the effect of immunizing a portfolio from financial market volatility.

 

When You See Or Hear ThisThink Of ThisDo This
articles, reports, or commentaries to "sell" or "retreat to cash"the author, broadcaster, or commentator does not know my situation and goals and therefore I cannot act on their information without careful consideration if at all
do not make rash decisions, instead contact us before making any decisions, we will help you validate that information and put it into perspective vis-a-vis your goals and investment strategy
sensational headlines and (“teaser”) previewsthe headline or preview is intended to sell publications and/or advertising and it is not designed to help me grow and maximize your wealthdon't purchase magazines with these headlines or watch programs that use sensational teasers
sensational articles, programs, or segmentssuch content is designed to sell the newspaper, magazine, or get people to tune in to a program to sell advertisingdon't read these articlesdon’t watch these programs and do not let such content cause you to make rash decisions
headlines that feature market declinesheadlines rarely report steady small gains that generate positive returnsfocus on positive matters not interim negatives, reassure yourself by researching the gains throughout your entire time horizon(s), and follow the guidance in tip #4
news that you think is compellingfinancial news, especially in print media, isn't really news, and by the time people receive, process, and act on most financial news it is already too late to capture most or any of the benefitdon't waste your time or money following a fearful herd off a cliff
experts on TV giving advice and/or making projectionsfinancial programs are entertainment (they are not sound individual advice) and reacting to what they broadcast can compromise my long-term focus leading to detrimental investment decisionsdon't watch these programs
(if you want to be entertained, choose a good movie or your favorite sporting event)

Illustrative Example

Large gains may come in quick, unpredictable surges. Missing only a small fraction of days when returns are positive, especially the extraordinarily positive days, will reduce the growth of your wealth. For example missing the 25 days with the best gains would have significantly reduced the gains in a portfolio based on the annualized compound return of the S&P 500 Index as shown in the chart below for the period between 1970 and 2011. A portfolio that could have risen by a 9.99% annualized gain would have instead risen by a 6.22% annualized gain. The gains are annualized averages and compounded , which by way of example of a $1,000 investment would change as follows … a disciplined investor’s portfolio could have risen in value to $49,614 where as the person that missed the 25 best day’s gains portfolio value could have increased to a much less amount of $11,889. The point is this – the investor who remained invested captured all of the best gains and achieved the highest gains in their portfolio. As the example shows, missing even a single best-day gains can be quite costly (in the case of the example, while the average annualized rate difference is relatively small the reduction in gains is more significant at 10% less). Investors that abandon the market or “transition to cash until the market settles”, even if only temporarily, adversely impact the growth of their wealth as shown by this example.

Cost of Missing Market Gains