Staying in Your Seat: Tips on Riding Out Market VolatilitySubmitted by Bernhardt Wealth Management on March 16th, 2020
We often compare the stock market to a rollercoaster ride, and with good reason. Think back to the last time you actually rode a rollercoaster … What was it like as the ride climbed up to its high point? Rather gradual, wasn’t it? And then, when it reached the top and started down? That was the part where people started screaming and your stomach felt like it was doing somersaults. For the last couple of weeks in the market, we’ve been on several of those stomach-churning drops on the rollercoaster known as the equity markets.
But consider this: What if, during that nerve-wracking descent or even at the bottom of it, you decided that you’d had enough and wanted to get off? What do you imagine the result would be if you tried to disembark the roller coaster while it was still in motion? It probably wouldn’t bode well for your long-term health—or your short-term health, either, for that matter! In other words, the best way to stay safe on a rollercoaster is to remain in your seat and finish the ride as you originally planned.
Perhaps the analogies with the present equity market are obvious. We are in a nerve-wracking period of volatility at present, most (but not all) of it driven by economic uncertainties around COVID-19 and the stringent measures being taken to limit its impact on the healthcare system. There is an element of personal uncertainty as well, as we wonder whether we or someone we love will become ill. All of this makes it hard to control our emotions, and the impulse is strong to sell everything, stick the cash under the mattress, and dive under the covers until the world feels more normal.
But the world and the markets go on, don’t they? In fact, the volatility we are seeing right now is actually a sign that the markets are doing what they always do: translating rapidly unfolding information into stock prices. Rather than seeing this as a cause for jumping off the rollercoaster, maybe we should instead focus on some time- and research-tested ways of responding to market volatility. Here are three good things to remember as the markets swoop and dive.
- For every seller, there’s a buyer. Markets exist to bring buyers and sellers together. Every time a share of stock is sold, a buyer believes that purchasing that share at that price represents an opportunity to make a profit in the future. Some days, there are more sellers than buyers, and prices fall giving buyers the opportunity to buy even more shares at better prices from their perspective. Other days, the opposite is true, and prices rise. But every day in the market, thousands of times each hour, a buyer and a seller are agreeing on a price that seems advantageous to both of them. That’s the way orderly markets work.
- Panic selling usually locks in losses. In the same way that jumping off a rollercoaster in the middle of the ride will usually get you hurt, dumping equity investments in a market downdraft will typically work against your long-term financial best interests. Naturally, it’s easy to believe you’re immune from panic when the financial sun is shining, but it’s hard to avoid indulging in it during a crisis. If you’re entertaining seemingly logical excuses to bail out during a steep or sustained market downturn, remember: It’s highly likely your behavioral biases are doing the talking.
- Tune out the noise. There’s a difference between following current events versus fixating on them. In today’s multitasking, multimedia world, it’s easier than ever to be inundated by late-breaking news. When you become mired in the minutiae, it’s hard to retain your long-term perspective. Or, as Wall Street Journal columnist Jason Zweig says, “Choosing what to ignore—turning off constant market updates, tuning out pundits purveying the latest Armageddon—is critical to maintaining a long-term focus.”
At Bernhardt Wealth Management, we are here to answer your questions and provide evidence-based, research-tested advice. We hope that you and your family are healthy (remember to keep washing your hands!), because ultimately, that is the most important thing of all. If we can assist you or provide any useful information, please call or email anyone one of my Bernhardt Wealth Management teammates.