Has the volatility of the stock market got you bummed? Is the light you see at the end of the tunnel just the notorious headlights headed right at you? “When your mood gets worse, so does your brain’s negative bias. Feeling down means you’re more likely to notice negative things about the world,” says Alex Korb, PhD, the author of The Upward Spiral, a book about the neuroscience behind depression. Our brains are wired to react more strongly to troubling news than to encouraging news. When negative emotions dominate positive emotions, we can get into a downward spiral that results in abandoning our sound investment plan.
If your sound investment plan back in 1986 had included buying and holding 100 shares of Microsoft’s IPO, you could have paid $21 per share for an initial investment of $2,100. Had you adhered to your plan and held onto those shares through the market crash of 1987, the dot-com bubble, the 9/11 events, the financial crisis of 2008 and the flash crash of 2010, your holding would now be worth close to $1,470,000.
Adhering to your investment plan is a good idea, providing your portfolio is soundly designed and balanced in accordance with your capacity and readiness to experience the risks. So how do you find the resolve to hang tough during a fickle market?
Have a Financial Plan
In addition to having an investment plan, have a financial plan that focuses on your short- and long-term goals. According to research by HSBC (one of the world’s largest banking and financial services organizations), people with financial plans amassed nearly two-and–a half times more retirement savings than those without a financial plan.
Stay Focused on That Plan
Memorize your short- and long-term goals. Block out negative news and stay focused on those goals and the choices you made when you designed them.
Know What You Own and Why You Own It
When the market takes a dive, understanding how a specific holding fits into you plan can help you decide whether to buy more at a lower price. This knowledge can also help you understand whether to replace a holding with another investment.
Learn from Your Mistakes
As Peter Lynch said, “In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.” If you own something that now feels like an impulsive buy, consider taking a tax loss, learn a lesson and remember it during future investment decisions.
Focus on What You Can Control
You cannot control the volatility in the market but you can control your investment behavior. Stick to your plan.
Continue to Save
If your losses are partially offset by growing savings, your total net worth might not look so bad. Your increasing savings may buffer your negative emotional impact from the market decline.
Use Cash to Help Manage Your Fears
Having a cash cushion can help you with the patience to stay the course. It can position you to take advantage of bargains in the down market. It can assure you that you do not have to sell investments to cover living expenses.
Avoid Catastrophizing
Dr. Korb explains that anxiety can be “exacerbated by envisioning the worst possible scenario. It usually starts with a perfectly reasonable worry, and then, through incorrect assumptions, it snowballs out of control.”
Imagine Optimistic Outcomes
You don’t have to believe the outcomes. All you have to do it believe that they could happen. This will activate the part of your brain that helps control negative slant. The market has recovered after every single bear market since the Great Depression. Investors who bailed out during the March 2009 dip missed out on the fourth longest bull market in U.S. history.
Look in the Rear-View Mirror
Retain records of prior years’ portfolio balance and your total net worth. If you are investing for the long-term, you can look back and see the progress you have made. Odds are that you made that progress with patience and strength. Use those attributes to get through a bear market.
Exercise
Dr. Korb explains that regular exercise “makes you mentally sharper and better at planning and decision making.” I have personally found that to be true, plus it improves my mood, reduces worry and lowers stress.
To get through strong market swings relatively unscathed, stay focused, watch your emotions and get regular exercise. Gee, that advice could also help you live long enough to enjoy your investment rewards.