Just as humans have emotions, markets have volatility. This is the reality of the markets, and investors need to accept that bear markets will eventually follow the bull market and vice versa. Regardless, we can agree that over the long term the stock market is a powerful investment tool.
The market's volatility can almost make someone feel like they have seasickness. The best way to cure seasickness is to keep your eye on the horizon. Just keep in mind that from a long-term perspective, the markets have in essence recovered 100% from every downturn in history and gone higher.
So try not to bring your emotions into your investment decisions. Don't let fear and greed run your portfolio. In times like these, fear could end up pulling you out of the market in what could potentially be a great rebound period.
Sir John Templeton, the founder of the Templeton Growth Fund, once said, “Forty years of experience have taught me you can make money without ever knowing which way the market is going.” Peter Lynch is of a similar mind: “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.” Daily market volatility reveals more about investor psychology than it does about the long-term value of your investment portfolio. Templeton, a contrarian by nature, considered daily media analysis as noise that could safely be ignored.
Bernard Baruch, a renowned American statesman and speculator, once advised: “If your stocks are keeping you awake at night worrying about them, you should sell to a sleeping point.” Know your risk tolerance, and buy and sell accordingly. Investors often think they are supposed to be risk takers, when in fact, successful investing is a function of risk minimizing and looking for what Benjamin Graham called “a margin of safety” in their investments. Informed speculation may have its place in a portfolio—but not to the point of sleepless nights.
As Benjamin Graham once said, “Investment is most intelligent when it is most business-like.” However, many investors make their portfolio management an emotional experience. People like to say they are a disciplined, long-term investor. And they are—as long as the markets are going up.
But markets are volatile; what is happening now has happened in the past. When the market recovers, it usually does so exceptionally. So my message for the investors is to hang in there, because successful investing is a long-term commitment.
Below are my suggestions for what to do right now. They will also be the same suggestions I will give in every uncomfortable market situation going forward as well!
Ride out the volatility. Rallies and corrections are difficult, if not impossible to predict. Stay invested as corrections are often short and do not last forever.
Identify buying opportunities. Historically, stocks have outperformed bonds, money markets, un-leveraged real estate, and inflation over the long term. Buying during a market decline or dollar cost averaging can be very effective strategies.
Sell the poor performers. Selling 10% to 30% of a portfolio to take advantage of better quality equities or to diversify into more defensive areas can also be very effective, although challenging to do, as timing re-entry is difficult.
Because no one can predict market declines with any certainty, a diversified portfolio is the best solution for a long-term investor who is concerned about both risk and return.
Steve Cook is a Financial Advisor with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James. Statistics and factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. This article is for information only. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member - Canadian Investor Protection Fund.
