Posted by Joe Wride
Humans aren’t always rational beings. If we were, we wouldn't eat food that makes us sick, procrastinate on key tasks, and try to impress people we don’t like. So what causes these hiccups in rationality? Simply put, it’s our emotions.
When we rely on our emotions alone to guide our behavior, we’re destined for trouble. This is especially true when it comes to our finances. All too often when the market is volatile so are our feelings about it. A scarcity mindset quickly sets in, and derails our decision making.
But it doesn’t have to.
So what do we do when the market is down? That’s what we’re here to find out. Together we’ll review the do’s and don'ts of investing in down market circumstances. That way, you’ll be able to recognize your emotions, process them, and come out making level-headed decisions amidst the uncertainty.
Do # 1: See Long-Term Opportunity
“Be fearful when others are greedy and greedy when others are fearful.” - Warren Buffet1
When a market is down, most people see scarcity. They see the need to cash out before things get worse. They see investing as something to put on pause until the financial smoke clears. But savvy buyers see the opposite.
Contrarian investors like Buffet see opportunity in the chaos. They see undervalued businesses with attractive new price tags. They see positions to take now that could pay hugely later on. They see the need for a long-term plan, and the need to stick to it.
When you approach investing with a long-term mindset, your eyes will be open to new opportunities. You’ll see that sometimes the best time to get in the market is when everyone else is leaving it. That’s because it allows your portfolio to expand in rock-solid, long-term positions at a much lower cost.
Don’t allow feelings of panic, sensationalized news, or other triggers to blind you to great opportunities. Create a plan you believe in, stick to it, and take advantage of investing in down market prices to grow in the long-term.
Do # 2: Study History and Get Perspective
No one knows the future, but the best predictors are studiers of the past. And if you want to see long-term opportunities during the downtimes, you’ll need more than wishful thinking. You’ll need to root your faith in historic performances.
A great place to start is by reviewing the biggest market crashes in history. When you do this, common patterns become apparent. You’ll notice things have been bad before… like really bad. But you’ll also see the market has always recovered, stabilized, and hit new all-time highs.
Another exercise worth your time is to see present market problems as objectively as possible. Too often our emotions are swayed by skewed, misleading, or outright incorrect information. But thankfully, there are a variety of ways to combat this.
Ways to improve objectivity include, but are not limited to getting information from multiple sources, consuming more long-form content, and increasing your awareness of triggers. By doing this ,you can avoid the trap of thinking how you feel is how things really are.
Do #3: Acknowledge Your Emotions
While emotions can cause impulsive, irrational decisions, they also give life its vitality. Without them we’d feel no pride in our work, excitement in our opportunities, or joy in our accomplishments. We’re not trying to repress our emotions, we’re just keeping them in check.
By acknowledging how we truly feel, we can do just that. For example, I know if I don’t eat properly, get enough rest, or take my anxiety medication, I’m prone to mood swings. If I don’t feel my best, making mentally healthy financial decisions becomes a lot harder. Therefore, I know I need to prioritize my diet and sleep.
For you, it may be something different. Perhaps watching the news makes you anxious, which in turn makes you want to act impulsively. You may then need to reevaluate your relationship with negative media. Maybe you’re prone to gambling addiction. If that’s the case, you may need to watch yourself around hot stock tips, or highly-speculative opportunities.
We’re weak when it comes to resisting our emotions. If our environment is one of constant temptation, we’ll eventually succumb to it. But by acknowledging our emotional weaknesses we can become stronger. So be honest about how you feel, and what makes you feel that way. Then design a system that works in alignment with your triggers.
Don’t #1: Try to Time the Market.
Let’s make something clear, no one knows for sure what the market is going to do. Whether you're an investment banker, hedge fund manager, financial analyst, or YouTube guru is irrelevant. But that doesn’t mean the market is entirely random.
We can use past performance and thorough analysis to predict the trajectory of market trends. Still these are only predictions, and they’re going to have faults. One of the biggest can be when something will occur.
It’s impossible to know how long a market will trend doward, take to recover, or reach a new high. For this reason, it’s imperative to not fall into the trap of thinking you’re able to time the market. Buy today, and you could end up catching a falling knife. Buy later, and you could miss out on a rally.
So forget about timing! Instead trust in the aggregate, long-term data. What we know for sure is that there’s been a full recovery from every down market in U.S. history. Yes, it’s always possible there won’t be another. But history tells us that’s our fear-based emotions talking. So take some deep breaths, keep investing, and hold/ buy those long-term value positions.
Don’t #2: Panic Sell
Panic selling falls under the umbrella of timing the market. But it plays a particularly damaging role in down markets. For this reason, it’s worth giving it extra due diligence when making investment decisions.
When the market starts dropping, the most common emotion-based reaction is to start selling your investments. You worry further drops are coming, and it could be years before a recovery happens- if it happens.
The problem with this (other than trying to time the market) is that it locks in losses. In a down market your portfolio’s losses start off as unrealized. That means your wealth is only down on paper. But if you panic sell, these losses become realized. You lose out on the potential for those positions to make a recovery, and you have less capital to be reinvested later on.
NOTE: In some cases, it can make sense to liquidate some of your positions in a down market. If for example you’re nearing, or are in retirement, your recovery time frame is shorter. However, even then, it’s critical you evaluate your needs and the true state of the market.
Don’t #3: Do Everything Yourself
Changing your investment mindsets, managing your emotions, and analyzing the market objectively is incredibly challenging. And if you attempt to do it alone, it becomes borderline impossible. That’s because the quality of our lives, financial and otherwise, is determined by the quality of our relationships.
We do our best work as a team. And that’s because we are able to rely on the viewpoints, knowledge, and experience of others. So when it comes to your investments, a key consideration needs to be made for expanding your personal network of help.
At Crafted Finance, our team of professionals is here to help you weather financial storms. We’re long tested in keeping our clients tracking through down markets. And if you’re ready to start talking to a professional, so are we. Schedule a complimentary consultation today, or call us directly at (650) 336-0598 with any questions.