Stock market volatility returned in the beginning of 2018 with a vengeance. It's possible to feel calm, confident and composed no matter how much the Dow Jones is up or down. Believe it or not, this goal is probably within your reach. Understanding the nature of stock market cycles will give you some perspective during periods of stock market volatility.
Markets Are Always Cyclical
Historically, the nature of the stock market has always been cyclical. Good markets last far longer than bad markets and they go up much higher than bad markets go down. In fact since 1924, while the average bad market has gone down 41% over a period of 1.4 years, the average good market has gone up 480% over a nine-year period. How can you possibly lose money in an environment like this?
The most common way is by getting scared out of your investments when you tune into media reports. The nightly news may show that the stock market has risen since the financial crisis, but you will also read the scary headlines that may have caused you to panic and abandon your investment program in the past. (For related reading, see: The 2007-08 Financial Crisis in Review.)
There was the Brexit vote in 2016, the Deep Horizon oil spill in 2010 and, of course, the 2016 election, which unnerved many investors. Any one of these events might have seemed foreboding and a good reason to sell your investments.
The problem with this emotional reaction is that more often than not, once the market recovers, you will be in a worse position than if you had stayed the course and not sold your investments. If you sold your investments, the result is likely to be sub-par returns.
Don't Let Emotions Rule Investment Decisions
You’re probably better off staying out of the markets entirely if you’re not able to stay in when the going gets tough. It’s by staying in the market during the difficult times that we earn our good returns. People who let their emotions rule their investment decisions find themselves in a terrible cycle where they are jumping in and out at precisely the worst times.
There is a solution for this problem. It’s called substitution. Your brain can only think one thought at a time. You can jump quickly from one worry to the next, but you are only capable of one thought at a time. When you are worried about the market, replace this thought with a positive one.
Whenever you notice that your mind is obsessing on what could go wrong with the stock market, your investments or anything else for that matter, simply pause and take a deep breath. Now that you’ve broken a pattern of negative thoughts for the moment, you can use a strategy that I've coined “change the channel.” Changing the channel is substituting a positive thought for a negative one.
Remember that history has demonstrated that the market does go down, but it goes up far more often, and for much longer periods of time. No matter how bad things seem right now, the market always recovers no matter how bad a given period of volatility is.
Investors should leave their investments alone until the stormy period in a market passes. If you have a plan that allows you to continue drawing money out of your investments whether the market is up or down, there is no reason to worry.
On the other hand, if you haven’t gotten around to creating a retirement plan and investment strategy, you should be worried during periods of market volatility. Worry and anxiety can also be great motivators and you can use periods of market volatility as an opportunity to fine tune your financial future. (For more, see: Tips for Investors in Volatile Markets.)
Disclosure: Securities and investment advisory services offered through NEXT Financial Group, Inc. Member FINRA SIPC. Hafner Financial Group is not affiliated with NEXT Financial Group, Inc.