How to keep yourself on track when markets are out of kilter
How should a successful investor handle stressful markets?
More precisely, how should an investor handle his own feelings when markets are rocky?
It is obvious to most investors that they can’t control the investment markets; they can only control their own reactions.
If they let their negative emotions get the better of them they will not only feel bad, but they will be more prone to making mistakes with their portfolios.
It is unfortunate that so many investors seem to be swayed by the negative and positive emotions of the day. When MSNBC and The Wall Street Journal say the sky is falling, they panic and sell; when markets have been rising for a period of time, they pile on, often at or near the market’s peak.
Test your beliefs
Look back at how you felt during the several major market declines of 2007.
As the Dow Jones Industrial Average seemed to fall off a cliff and the financial commentators warned of more trouble ahead, how did you feel? Did you worry about losing everything, about being poor, about not making it in retirement?
Try approaching these fears and emotions as a behavioral therapist would: identify the irrational beliefs that underlie your fears. Often you will find that the beliefs don’t fully correspond to reality and your fears are not warranted.
There is a toolbox of tricks and self-talk that even the most sophisticated investor can use to calm himself and use to stay on track.
Do a reality check
First, when the market plummets and the headlines are bad, take a look at your own portfolio: has it really done that badly?
Assuming you have maintained a balance of various types of stocks and bonds, both domestic and international, it is unlikely you are experiencing the same level of losses as the market.
Bonds, for instance, are probably going up as stocks go down, so gains on part of your portfolio are offsetting stock market losses.
Next put your portfolio into its historical context. Yes, its value may have dropped over the last week, but where was it one, two, or three years ago? Chances are it is still ahead of those periods. How did you feel a year ago when your portfolio wasn’t as high as it is today? You probably were feeling good because it had gone up at that time. Why shouldn’t you feel even better today when it is higher than it was then?
Next, look at the stock market itself. What’s the worst it has done? Any brief study of stock market history shows that although some stock markets have disappeared when their countries were struck by war or revolution, the major markets have survived every crisis thrown at them. In fact, they have always recovered and eventually moved to higher ground.
This quick look should convince you that you can’t lose everything. Again, market history shows that the more diversified a portfolio is, the better the chance that over longer periods of time—five, 10, or 15 years, say—you will not only have a positive return, but your gains will be respectable.
Finally, learn to accept temporary setbacks and uncertainty. We live in a probabilistic world; learning to take events as they come will help you survive the inevitable setbacks that come along. If all else fails, shut off the TV and ignore monthly account statements for a while; chances are things will look better down the road.