A key to surviving the global market selloff: be lazy
If you feel the urge to take action during market volatility, try these approaches.
Here we go again with another round of market volatility sparking fear in investors’ hearts. But if we were to suggest one way to manage the volatility stress, it’s this: Be lazy.
During market volatility, our decision-making biases often get the better of us, prompting us to make impulsive choices that could have a lasting negative impact on our finances.
We may fall prey to recency bias and believe that an 8% drop in our portfolio means that it will continue to drop. Market volatility can also spawn herding behavior, leading investors to blindly following others as they collectively panic and sell.
We can’t eliminate these types of biases, but we can use time-tested techniques to prevent them from affecting our decisions. One of the easiest—and often best—things to do is … nothing at all.
With that in mind, here are a few tips we suggest for managing the current market volatility.
Tip number one: Be lazy
Market turmoil is unsettling. But if history has taught us anything, it’s that market volatility is an inherent part of investing and doesn’t matter too much for long-term investors.
Provided your portfolio’s asset mix is still a good fit for your time horizon and financial goals, you’re likely better off ignoring the short-term fluctuations. We know that’s hard to do amid news articles featuring fear-inducing phrases like “Wall Street bloodbath” and “$1 trillion wipeout.” So why not take a break from the constant market updates?
While it can be important to stay connected and up-to-date on world news, constant monitoring of media feeds (especially market fluctuations) can trigger behavioral biases that hurt more than they help. There is a line between being an informed investor and obsessing over market movements—and during market volatility, this line can become increasingly difficult to identify.
So, try setting up a regular schedule for how often you check your portfolio or even look over market news. Also, try limiting your news feed to trusted, well-balanced information sources—such as those that add context - a 1,000-point drop in the Dow is really only 2.5%.
Tip number two: Focus on your long-term goals
If you feel anxious about your finances and the market movements, take a break and consider your long-term financial goals. Reacquaint yourself with what you’re working toward, why you are saving, who inspired you to set those goals, and how you plan to reach them.
Consider this: Is your financial goal to beat the market? Or is it to have a comfortable retirement, buy a beach house in a few years, or save for your child’s university education?
For many investors who have already tailored their financial plans (and attention) to their long-term goals, short-term fluctuations may not be too big of a concern. When examining the performance of your portfolio, keep your long-term goals in mind and not the day-to-day ups and downs of the market.
Adopting a long-term focus is not natural (nor easy with news cycles measured in hours), but you can use our three-step process to slow down and recommit to your goals.
Tip number three: If you need to take action, take thoughtful action
It’s hard to stay calm and wait out the storm when your portfolio is losing value—we all have a tendency toward action. If you can’t suppress that urge to take action, try redirecting it.
For example, instead of trying to identify investments you’re going to sell, spend your energy making sure your financial plan is on track to meet your goals. This could involve ensuring that your portfolio is well-diversified or checking that your emergency savings fund is sufficient.
Or, if a scarcity mindset is getting the better of you, it may be a good time to do a budget audit and cut down on any unnecessary expenses. If all else fails, reach out to someone you trust who can serve as a steady, guiding hand through this bout of volatility. This could be a professional financial advisor or a levelheaded loved one.
During volatility, our own behaviors are our worst enemy
We all know market volatility is a natural occurrence that will pass (as it always does), but the emotions we feel during it can be even more dangerous than market movements themselves.
When stress and anxiety are high (and contagious), it’s easy to give in to our biases and let them cloud our better judgment. Benjamin Graham warned about this many market cycles ago: “The investor’s chief problem—and even his worst enemy—is likely to be himself.”
But we can use lessons from behavioral science to prevent biases from derailing financial plans. We can make it easier for people to make the right decisions when it counts, sidestep biases when possible, and stay focused on our long-term goals. Sometimes that means evaluating the evidence, thinking carefully … and then doing nothing.
