Uncertainty. We’ve heard that word a lot in the last few years. However, we have also seen that in nearly every uncertain period, resilience has manifested. Change is a constant part of our day-to-day lives.
Some would argue that it’s the only thing we can accurately predict. In my experience which has spanned more than three decades in wealth management, I have seen market volatility come and go – and it is expected.
The cycles are familiar—the economy expands and contracts and the markets rise and fall, and often our emotions get caught in the waves of change.
According to Schwab, market cycles vary in length. They’ve shared:
“A bull market is a long-term uptrend marked by optimism and a robust economy. By contrast, a bear market is a prolonged downtrend, usually marked by declines of 20% from recent highs, accompanied by widespread negative sentiment. The record bull run in U.S. stocks, which began in early 2009 and ended in March 2020, is a recent example of a long-term market cycle.
Long-term cycles can also include several shorter cycles. For example, within a long-term cycle, there might be short-term sell-offs that didn’t turn into bear markets or periods of largely sideways price movement. As illustrated in the chart below, investors can reference a monthly chart of a benchmark like the S&P 500® index (SPX) for the past 20 years to identify previous long-term market cycles.”
Throughout the years from cycle to cycle, I have said to clients, friends, peers, and beyond – get focused, not emotional. Learning to master your emotions can allow you to become a better investor because instead of making reactive choices, you can make intentional choices.
Here are 10 steps to manage the emotional flair that can occur when change rears its ugly head. These steps can pave the way for sound investment decisions while helping you maintain your overall well-being.
- Understand the Need to Evaluate Your Plan: Revisit your investment strategy based on your goals, risk tolerance, and time horizon. Review the guidelines you have in place for how to react to market fluctuations based on your individual scenario.
- Be On a Need-to-Know Basis: Keep up with market news, but don’t let it dominate your thoughts. Aim for a balanced view by consuming information from reputable sources without getting caught up in sensational headlines. Headlines sell but they are often a lot of hype to get views and clicks.
- Practice Mindfulness: Techniques such as deep breathing, meditation, or yoga can help you stay grounded and manage stress. Mindfulness can help you observe your emotions without letting them dictate your actions.
- Diversification: This can help mitigate risk while opening the doors of opportunity. Diversification can provide a cushion against market volatility that may result in a more stable overall return.
- Focus on Long-Term Goals: Keep your long-term goals in mind to avoid making impulsive decisions based on short-term market movements. Reactive decisions very rarely yield favorable results.
- Respond with Intention and Not Impulse: A knee-jerk reaction often doesn’t consider the whole picture. Instead, assess the situation from a 360-degree perspective, and consider whether any action is necessary based on your strategy.
- Communicate with Your Advisor: Connect with your trusted advisor to get an objective perspective on your investments and ensure that your strategy still aligns with your goals.
- Manage Expectations: Understand that market volatility is normal and that investing involves risk. Set realistic expectations for returns and be prepared for ups and downs. It’s all a part of the process.
- Acknowledge Your Stress and Address it: A healthy lifestyle supports emotional resilience. Taking the time to get in a good workout, ensuring you are getting enough quality sleep, and making nutritious food choices can fuel you during times of heightened stress. Recognizing you are under stress if the first step in preparing to address it effectively.
- Reflect on Past Experiences: Think about how you’ve reacted to past market volatility and whether those reactions were beneficial. Learn from past experiences to improve your response in the future.
We may not be able to control what happens to us in life, but we can always control how we respond to things. The key is to respond – not react. Reacting is an emotional response to a situation that’s often impulsive and can be influenced by our past experiences or fears.
Responding is a thoughtful and deliberate action that involves considering the situation, weighing the options, and making an intentional decision.
By integrating these practices, you can better manage your emotions and make more rational decisions during periods of market volatility.