If you have money in the stock market, this week, this month, and this quarter have been brutal. Actually, this year has been one helluva roller coaster ride.
As I write, all three indices are down year-to-date: the Dow is down 21%, the S&P is down 25%, and the Nasdaq is down 33%. So if you haven’t yet looked at the market values of your account(s), do yourself a favor: don’t. I did and…oof, it was painful!!
The market goes up and down all the time. But the daily swings “hit” differently when we’re in the midst of a bull market vs. in bear market territory, like right now. In the former, investor confidence is high and investing feels less risky.
However, when the markets are a mess, which is how we usually describe bear markets, the opposite sentiments are at play.
Confidence is low and investing feels more risky. And if you react to this feeling by either selling your holdings or by putting a pause on your investing, you just might do more harm than good.
A Few Good Reminders
Something that often gets lost during the “downs” or when we are in bear market territory is that volatility is natural. That’s the first reminder to keep in mind during “seasons” like this.
Here are few others:
Volatility can’t be avoided.
The timing of the ups and downs can’t be controlled.
Periods of immense volatility will present you with challenges and opportunities, remind you that uncertainty is ever-present, and will expose which type of risk you prioritized.
Be cautious and resist the temptation to only focus on the downs (or losses), because volatility includes positive returns (ups or gains), too.
Now, if you know me, then you know today’s missive isn’t just about the volatility in the markets.
Because volatility exists in life and in business, too.
So as you continue to read, think about how you usually respond to the ups and downs you encounter – in your investment portfolio, in your life, and in your business.
Particularly when those “seasons” of downs feel more acute. (Because let’s be honest, we rarely question when we’re riding a streak of “ups.”) 🙂
Also, take note of what causes you to pay attention and notice the shifts from up to down and from down to up.
Reacting to Risk
Volatility tends to reveal and/or confirm one’s comfort level with the risk they’ve taken – intentionally and unwittingly. And much like volatility, risk is naturally embedded in the process.
Yet, not all risk is the same.
The reason I say volatility isn’t the problem is because people tend to react to volatility, when you’d be better off making sure you’re managing the “right” risk.
Here’s what I mean:
Make sure you’re not just focused on the risk of what you might lose. Be sure to consider the other risk, or what I call the “opportunity cost,” too. In other words, what’s the risk of not doing something – or losing out on what you could gain?
And whether we’re talking about investing or making decisions in life and in business, folks tend to be more risk tolerant when things are going well (e.g., bull market) and more risk averse when things aren’t going well (e.g., bear market).
Discipline Looks Like…
Right now, with the news coverage about (global) inflation concerns and the daily “closings” of the Dow, S&P, and Nasdaq, volatility is getting a bad rap. It’s being blamed for why some people are selling their holdings and/or have stopped investing.
But, from my perspective volatility – wherever it shows up – isn’t the problem.
Not having a system for dealing with the volatility and managing your risk is!
With a system, you’re able to discern and make a distinction between what’s temporary noise vs. a flashing red-warning sign you need to heed.
A system keeps you disciplined.
And, it doesn’t have to be elaborate to be extremely effective.
For example, when it comes to investing, practicing dollar cost-averaging, having diversified holdings, boosting your liquidity, and focusing on the long-term contribute to managing risk and riding the waves of volatility – individually and collectively.
Sure, none of these are new to you. But on the heels of weeks, months, and a quarter like what we’ve just experienced, this may be the reminder that can help you reset – literally and maybe even emotionally.
Here’s another thing about systems: they are agnostic.
The same practices noted above that work when it comes to investing can do likewise in life and in business.
As an example, let’s take a look at dollar-cost-averaging or the practice of investing a fixed dollar amount on a regular basis, regardless of the share price or whether the market is up or down.
In business, practicing daily and weekly sales activity is akin to dollar-cost-averaging. Being consistent with your sales activities is the equivalent to the “fixed dollar amount on a regular basis…” And it protects you from the tendency to slow down when things are going well.
Or, what about having diversified holdings.
Where asset allocation is about how much you have in stocks, bonds, and cash, diversification takes it a step further. It looks at the allocation within the broader asset classes. For example, how much of your stock portfolio is in large vs. small stocks or in value vs. growth stocks.
Bear markets will reveal where your portfolio is vulnerable because it is now over- or underweight in an asset class. This will provide clues as to how you might want to reassess your allocation.
Similarly, slow periods in business will expose where you’re vulnerable. It’ll reveal if you are expending too much energy (or perhaps not enough) on certain offers or types of client? And while some of my peers disagree with me, it’s why I counsel my clients on having more than one offer and serving more than one client base.
Time (and Cash) Make a Difference
I stand by what I said earlier about volatility not being the problem; that it is more a matter of managing risk.
But, I also know time plays a critical role here, as well. Because the time horizon determines when what’s just volatility for one person is actually risky for another. If you need cash right now to meet your obligations and short-term goals and desires, this isn’t just about enduring volatility…this is actually a risky moment in time for you.
If you’re freaking out right now about inflation, the bear market, your portfolio, and what it all means, I hope today’s missive provided a tad-bit of comfort.
And if you’re calm as a cucumber, please forward this to someone you know who isn’t.
