Stock market volatility during the past week has millions of investors on edge.
And Forbes writer Brett Steenbarger, a psychologist who has been “fielding an unusually high level of phone calls and emails from concerned traders and investors,” shared his three keys to navigating the stormy financial waters for both private investors and professional money managers in an article over the weekend.
Here on Money & Markets, we’ll cover the most important points of his piece.
- Understand How Volatility Works — It’s commonly recognized that volatility rises during market corrections and bear markets. Less well appreciated is the fact that this ramping up of volatility is not a linear function, but an exponential one. The best thing you can do, psychologically, at these times is not buy or sell but breathe. The faster the markets, the more deliberate you want to become.
- Understand The Larger Picture At Work Here —A prudent investor has to consider the possibility that there is a larger picture at work here that could lead to further correction and that might require near-term adjustments, such as portfolio hedges.
- Understand The Potential Reward At Work Here — There has been considerable short term movement–and it has been in both directions. Moreover, some of the further declines have been sizable, as in 2008, 2011, 2015, and early 2018. Once again, this calls for caution and planning. That being said, many of these volatile periods have occurred near important market lows, also as in 2008, 2011, 2015, and 2018. When everything is downticking, it means that investors are bailing out of the great majority of shares–the good companies and the not-so-good. Recently we saw fewer than 5% of stocks in the S&P 500 universe trade above their 3, 5, 10, and 20-day moving averages! That kind of fearful selling often marks periods of longer-term value and opportunity.
The most important psychological takeaway, Steenbarger says, is that the usual advice of trading coaches — staying disciplined and stick to your plans — can be detrimental.
Markets have changed: direction has changed, correlations among stocks have changed, volatility has changed. Just as you would adapt your travel plans if you saw bad weather, it makes sense to revisit your trading and investment plans when the market climate shifts.
Click here to read the article in full.