Nine Suggestions to Help You Stay Sane in a Volatile Market

Fast Moving Rollercoaster - Nine Suggestions to Help You Stay Sane in a Volatile Market
Have a game plan, stay on course, and more tips to check out if your head is spinning from this volatile market.
The following letter was sent to clients earlier this week. I thought you might find these suggestions to help you stay sane in a volatile market helpful as well.

For investors, the 2022 stock market continues to be a difficult one. Not surprisingly, it can be hard to keep your cool during one of the market’s periodic roller-coaster rides. You can benefit from having strategies in place that can help prepare you both financially and psychologically for market volatility.

Here are nine suggestions to help keep you from making hasty decisions and stay sane in a volatile market. Making such decisions could have a long-term impact on your ability to achieve your financial goals.

1. Remind yourself that this too shall pass.

Financial markets are cyclical. Both bear and bull markets are inevitable. Even if you wish you had sold at what turned out to be a market peak, or regret having missed a buying opportunity, you will likely get another chance in the future. Or if you were considering changes, a volatile market might not be the best time to turn your portfolio inside out. A well-thought-out asset allocation still serves as the foundation for good investment planning.

2. Have a game plan.

Having predetermined guidelines that recognize the possibility that turbulent times may be ahead can help prevent emotions from dictating your decisions. For example, we incorporate elements into the Apprise investment process that help determine when accounts should be rebalanced. For those who must withdraw cash from their accounts, we look to hold enough cash to keep them from selling assets during a market downturn. Diversification can allow you to offset the risk of certain holdings against those associated with others. Diversification may not ensure a profit or protect against a loss, but it can help you understand and balance your risk in advance.

3. Remember that everything is relative.

Much of the variance in the returns provided by different portfolios can generally be attributed to their asset allocations. If you have a well-diversified portfolio that holds multiple asset classes, it could be useful to compare its overall performance relative to relevant benchmarks. Unfortunately, a diversified portfolio does not mean your portfolio won’t decline, especially in years like 2022 when almost every major asset class is down. In this declining interest-rate environment, bonds are providing their worst returns in decades. But diversification means that when the S&P 500 declines 10% or 20% it doesn’t necessarily mean your overall portfolio will fall by the same amount. As a portfolio manager, I strive to keep that from happening.

4. Stay on course by continuing to save.

This one could easily be higher on this list. Even if the value of your holdings fluctuates, regularly adding to an account can somewhat mitigate the emotional impact of market swings. If losses are offset even in part by new savings, your bottom-line number might not look quite so discouraging.

If you use dollar-cost averaging – investing a specific amount regularly regardless of price fluctuations – you may be getting a bargain by buying when prices are down. However, dollar-cost averaging can’t guarantee you will earn a profit. It also won’t protect against a loss. Keep in mind your ability to continue purchasing through a down market. Systematic investing won’t work if you stop investing when prices fall. You should also remember that the return and principal value of your investments will fluctuate as market conditions change. Your investments may also be worth more or less when you sell them.

Here’s another thing to keep in mind. Even if you can avoid losses by being out of the market, will you know when to get back in? History says you probably won’t. You’re also likely to wait too long to get back in meaning that you’ll miss out on at least some of the market’s recovery.

5. Use cash to help manage your mindset.

If you regularly withdraw funds from your portfolio to fund your daily living, knowing that you have available cash can help. When it comes to your portfolio, cash can help you take deep breaths and relax. It can make it easier to make thoughtful decisions rather than impulsive ones. If you understand your risk tolerance and have an appropriate asset allocation, you should have resources on hand to prevent you from selling stocks to meet ordinary expenses. The combination of a cash cushion and a disciplined investment strategy can change your perspective on market volatility. If you are adding to your portfolio, cash can better position you to take advantage of a downturn by picking up any bargains that may present themselves.

6. Remember that a falling market can be your friend.

I think this passage from Berkshire Hathaway’s 1997 chairman’s letter sums this up quite well.

How We Think About Market Fluctuations

A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

For shareholders of Berkshire who do not expect to sell, the choice is even clearer. To begin with, our owners are automatically saving even if they spend every dime they personally earn: Berkshire “saves” for them by retaining all earnings, thereafter using these savings to purchase businesses and securities. Clearly, the more cheaply we make these buys, the more profitable our owners’ indirect savings program will be. …

So smile when you read a headline that says “Investors lose as market falls.” Edit it in your mind to “Disinvestors lose as market falls — but investors gain.” Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other. (As they say in golf matches: “Every putt makes someone happy.”)

We gained enormously from the low prices placed on many equities and businesses in the 1970s and 1980s. Markets that then were hostile to investment transients were friendly to those taking up permanent residence. In recent years, the actions we took in those decades have been validated, but we have found few new opportunities. …

7. Remember your financial plan.

Solid asset allocation forms the basis for sound investing. One of the biggest benefits of a diversified portfolio is that strong performance by some investments may help offset poor performance by others. Even with an appropriate asset allocation, part of a portfolio may underperform at any given time. I know of nobody with a positive long-term track record of successful market timing. When market volatility increases, the impact of making a wrong decision can get magnified.

8. Remain focused on the long-term.

If you invest for the long term, it can help to look back and see how far you’ve come. If your portfolio is down so far this year, it can be easy to forget about any progress you may have made over the years. As the market goes up and down, we can easily focus too much on day-to-day returns. It’s better to keep your eyes on your long-term investing goals and your overall portfolio. While past performance does not guarantee future results, remember that on a historical basis stocks have typically outperformed bonds, cash, and inflation. Stock returns have also involved higher volatility. If stock prices only went up, then risk would be eliminated from the equation. It would also lead to weaker returns.

9. Remember why you invest.

As discussed in more detail in this blog, the goal of investing shouldn’t be to beat the market. We invest to position ourselves to maintain our quality of life both today and tomorrow. Trying to beat the market implies taking on more risk. Meeting your goals and doing what matters most to you is more important.

10. Bonus tip. Take care of yourself.

Tracking your portfolio too closely can be stressful. Watching the financial media sensationalize the news can make things even worse. Review your financial plan. Are you still on target to achieve your goals? Go outside and get some fresh air. Make sure to get regular exercise. I start my workday with time on the elliptical or a bike ride. Doing that helps keep me sane. It also lowers my stress levels.

Closing Thoughts

Stocks closed the month of May with strong gains – ending a seven-week losing streak for the S&P 500. That performance left the S&P 500 nearly flat for the month. While that rally may have provided some relief, we don’t know yet if we’re out of the woods. The S&P 500 fell about 1.2% last week. On their own, neither week provides enough information to know if last week’s gains represented a false rally or if this week’s decline means that the market will continue to fall. Whether we like it or not, this is how markets work. Don’t panic. Don’t change your strategy either. It’s important to recognize that volatility is part and parcel when it comes to investing. It comes with the territory.

While I provided some reasons that a falling market can work to your benefit above, that doesn’t mean we have to be happy about it. None of us “enjoys” seeing stocks fall. At the same time, you don’t want to lose your head either. Recognize occasional declines for what they are – evidence that investing involves risk. After all, nothing in life comes without risk.

I can provide numerous charts showing how successful “buy and hold” investing has been through the years. But being a “buy and hold” investor in a falling market is hard. I hope the suggestions above can help you “keep your head while others about you are losing theirs…” That they can help you stay sane in a volatile market.

If you have any questions about your portfolio, your financial plan, or anything else related to your finances, please send an email to or schedule a call.

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