Well, this is interesting.
After 12 positive months in 2017 and a good start to this year, the Dow fell by nearly 3.5% last week — its worst week in two years. And it’s falling further today — as you may be aware.
So, let me ask you, “How are you doing?”
If you’re like most stock market investors, you may be feeling somewhat uneasy.
But times like these come with the territory of investing in the stock market. And as difficult as they can be, they also provide an invaluable opportunity to grow as an investor.
Of all the risks you face when you put money in the market, the risk of getting in your own way is arguably the greatest threat to your success. It’s human nature to find it difficult to imagine the future. Especially with the market having gone through an extraordinarily long period of extremely low volatility, this turbulence may feel somewhat jarring. You knew in the back of your mind the markets wouldn’t stay calm forever, but still…
It’s also part of our human nature to feel the pain of loss more acutely than the pleasure of gain. All that to say, if you’re feeling a little on edge, you’re not alone. It’s very normal.
But hopefully you’re not entirely like most stock market investors. After all, SMI frequently exhorts its members to make sure they have a plan they can live with in good times and bad, and then to stick with that plan. And of course, we preach the message of aligning the risk profile of your portfolio with your risk tolerance.
But here again, risk assessments are usually taken when the market is calm. There’s a difference between saying you’d stay the course if your portfolio slid by a certain percentage and actually seeing your portfolio begin to slide.
The re-emergence of market volatility has me thinking once again about the importance of having a trustworthy process behind your investment strategy. Yes, it’s ground we’ve covered many times before. However, because of the persuasive role our emotions play in shaping our behavior, it’s a topic that’s worth revisiting from time to time — and especially at times like this.
So, ask yourself these questions about the process behind your investment strategy.
- Is it objective and rules-based?
- Do you understand and agree with its design? Could you explain it to a teenager?
- Is it emotionally acceptable to you? That means two things — first that you’re comfortable doing what it takes to execute the strategy, and second that you’re comfortable staying with it in up markets and down markets.
That last one — the emotional acceptability piece — is what’s being tested right now. As we discussed in a recent post titled Risk Tolerance Live Fire Testing, there’s nothing like a downturn to put your convictions to the test. It can be unnerving, but it can also be beneficial.
So, at the risk of sounding cavalier, don’t let this downturn go to waste.
Use it to build your resilience. Just as athletes get better at handling pressure situations through the experience of competing in many such situations, investors get stronger through the experience of investing in turbulent times.
Use it to review what’s gone into the construction of your portfolio. Hopefully, you answered “yes” to the three questions above. If so, be reassured. They are key elements of a trustworthy process.
Use it to remind yourself that any fear you’re feeling right now is completely normal — just like it’s normal to feel nervous before giving a presentation. As mentioned earlier, there’s something about our design that gives us heightened sensitivity to pain. It’s something to notice, acknowledge, and pray about. However, when it comes to investing, it’s not usually something to act on. That’s because if fear drives you out of the market, fear will usually keep you out of the market during much of the recovery that follows.
How are you doing right now?