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For the past few weeks I’ve covered my eyes before looking at my investments and just looking through my fingers – like I’m facing Freddy Kruger rather than a series of numbers. It doesn’t help that the financial headlines are full of frightening potential futures: a possible recession, trade wars, and possible market corrections.
It’s enough to make me want to get all of my money out of my investments and keep it in a safe place like my mattress.
But no matter how overwhelming a market volatility may be, I also know that the worst thing to do is to pull my money out of the market when my portfolio is sloping. That’s because the only way to ensure that temporary losses become permanent is to sell.
Of course, knowing you should stay on course is a lot easier said than done. If you are tempted to cut your losses when hearing dire financial forecasts, then learning how to stay cool is especially important. Here are some ways you can stay calm when the market is scary.
Remember, it’s okay to hide
Hiding your head in the sand brings a lot of flak, but sometimes it really is the best course of action. This is due to a cognitive bias that prompts us to take action in response to fear. We feel that doing something, even if it’s counterproductive, is better than sitting around doing nothing. But listening to the action bias is why people sell when the market is lowest and buy when it is highest. They are afraid to do nothing.
Since it is almost impossible to overcome the voice in our heads calling us to “do something!” When the market is falling, the easier way to overcome action bias is to simply ignore your portfolio.
Of course, that doesn’t mean you should never check your inventory. However, if you obsessively consume financial news and review your portfolio on a daily basis, you will make fear-based (or greed-based) decisions instead of following your rational investment strategy.
Instead, plan to regularly review how your investments are performing – either every month or every quarter. This gives you the information you need to keep your asset allocation in balance and make any necessary changes without falling victim to action bias. (See Also: 5 Ways To Invest Like A Pro – No Financial Advisor Required)
Take comfort in the story
While the phrase “past performance is no guarantee of future results” is as good as tattooed on the forehead of every financial analyst, there are good reasons to look at past performance of the entire market. When you examine long-term trends and historical total returns, you will find that the markets inevitably trend higher.
Knowing that the market will rebound is no longer fun to weather the short term losses and volatility, but it is easier to put the current losses you are experiencing into context. Savvy investors, who did not panic by the market corrections of 2000 and 2008, rebounded over time. As stressful as going down a decline, trusting a solid investment plan and long-term historical trends in the market can help you stay on course and feel confident that you and your money are getting to the other side. (See Also: How To Prepare Your Money For The Coming Economic Cool-Down)
Make a volatility plan
One of the reasons we tend to overreact to volatility is because we forget that it is a natural part of financial markets. Market downturns are normal and we should assume that we will experience several of them in a long career as an investor. However, we often expect that the markets will only rise. With this type of anticipation, even a small break-in can feel overwhelming.
A good way to counter these expectations (and the fear that comes from them if they are not met) is to create a plan for what you will do during a downturn.
Your volatility plan could be as simple as committing to your head-in-the-sand strategy for downturns. Knowing in advance that you will cut down on your portfolio check-ins when things look bleak is a great way to stick with this plan.
Your plan can also be proactive, not just reactive. Knowing that market downturns are normal and natural, decide in advance how to incorporate those fluctuations into your investment strategy. You might choose to buy more investments than anything to worry about during a downturn. (See Also: 7 Easy Ways To Build An Emergency Fund From $ 0)
People aren’t wired to be rational investors, which is why we tend to be so bad at it. Our emotions can improve our rational strategies, especially when we are afraid. However, selling your assets due to market volatility and scary headlines requires a permanent solution to a temporary problem.
Think about how you can react to terrifying market changes before they happen. Then you know you already have a plan to fall back on and are less likely to simply react out of fear.
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