By Michael J. Searcy
Are you limiting your investment success by letting emotions about market volatility control your decisions? We know that you’re more likely to find success, however you define it, if you have a plan in place. Your plan needs a defined purpose and vision, corresponding goals, and a timeline for measurement. But it’s not enough to just have a plan, you also have to trust your plan. When emotions take over, they can quickly steer you off course. That doesn’t mean prudent changes can’t or won’t be made along the way to your goal, but without discipline, you may as well throw your plan out the window or not bother making one at all.
This year has already taken us through some market ups and downs. After months of relative calm, extreme movement in the market can lead to confusion. Fluctuations can be unnerving and it’s very normal to have anxiety, especially when headlines are shouting doomsday predictions to get more attention. Understanding the potential causes of the volatility and having steps in place to get through the fluctuation can help ease your anxieties.
What’s Behind the Fluctuation?
One question I hope people ask themselves to keep perspective during market volatility is: Are companies really worth 2%, 3%, 5%, etc. less today than they were yesterday or last week? While sometimes there may be economic cause for companies to lose value, often the volatility is due to worry and speculation. When other investors exhibit emotional behavior, it can cause you to question whether you should follow that behavior. In those times, ask yourself…
Have My Goals Changed?
It’s important to keep a long-term perspective throughout your entire investment journey, not just when we experience market dips and your advisor tells you over and over to keep that long-term perspective. Why? Because in the short term, the market trades on fear, anxiety, greed and emotion. But over the long term, emotional investing levels out and economic fundamentals drive the market.
Even in the short term volatility, the chances that you’re still on track to reach your end goal are high, but staying invested with that perspective usually gives you a better opportunity to make up for any short-term losses you might endure. Having a well-structured portfolio that contains a variety of investments, pursues individual objectives, and reflects personal risk tolerance is incredibly important.
Where Are the Opportunities?
Staying on course with your plan does not eliminate the opportunity to be flexible and look for opportunities during volatility. This is an action item we manage on behalf of our clients, but DIY investors should stay mindful that opportunity can come at all times. After the August 2011 correction, the S&P 500 had gained 25% just a year later.
With the right tools and questions, you can help settle your emotions and stay on track for personal success.