A lot of discussion has taken place about the recent volatility in the market. Big swings, up and down, are now the norm. Some have speculated that the waves have been caused by gamblers looking for a quick win. “It’s hard to bet on your team when no teams are playing… Hey! Let me make a quick bet on a company (buy stock and then sell it) for an easy win!” Others view the cause as the economy and some underlying problems. Investors are left asking themselves new questions and perhaps reconsidering what this means to their long-term strategies.
To be clear, these daily price movements are not new, nor is it risk, this is volatility. Volatility is defined as large price movements in companies that often occur without notice or reason. As a group, large US-based companies are not operating any differently today than they were last week. But you wouldn’t believe that was the case by reviewing the last two weeks of price history. Movements in all companies, industries, and geographies are not immune to big swings in value. This perceived value gets in our brain and can play tricks on us if we are stuck thinking about the numbers or analytics of a particular company. I won’t buy until the company is worth $X. I’m selling when the company hits a low of $Y. All of these are outcome-driven decisions that may seem rational when you’re attempting to make sense of price movements.
So, what does one do? Sit it out? Wait for calmer waters? Attempt to rationalize and make sense of what’s going on? Unfortunately, that may not provide you the reassurance you are looking for. Sitting things out, waiting for the perfect time to invest, may trigger other feeling and emotions. FOMO, or “fear of missing out” tends to weigh heavily on the minds of investors based on their choices and associated outcomes. This action also reinforces a timing and selection mindset when focusing on investments. Neither is good for your financial plan, or your health.
What are practical steps you can take to address the uneasy feeling of continued price movements?
- Tune it out. If watching your investments and values daily/weekly/monthly has that big of impact on your emotional well-being, just tune it out for a while. Our planning approach focuses on goals and priorities first – before deploying an investment strategy. It would be unwise to change your approach to investments if your fundamental goals have not changed. Keep your eye on the prize and avoid constantly monitoring your accounts.
- Hold more cash. Everything seems a little sunnier when you have more cash in the bank than necessary. You are less prone to worry about what’s happening when you have that cash stashed away. Why? Because you have cash at your disposal to do what needs to be done. Boring old cash is rather exciting, and a great dose of medication, for an uneasy stomach triggered by volatility.
- Individual companies, especially the one you work for, are exciting to watch and grow. However, it may be better for you to consider diversification beyond one company. Owning all companies in a broader investment approach, via the use of index or exchange traded funds, makes diversification possible.
- Grow your knowledge regarding the difference between risk and volatility – and ultimately, its impact on your long-term success. I’ve written more here on this topic.