Focus on what you can control.
When markets get volatile, this is what I focus on
The S&P 500 is roughly 8.5% lower than it was at its all-time high, which was made less than a month ago. This isn’t fun for anyone, but of course, a downturn poses a significant opportunity for those with the means to purchase cheaper assets.
Don’t worry, this is not yet another buy the dip piece. I already covered that last week.
Based on the sentiment, you’d think stocks were in a 1929 depression. They’re not even close to anything like that. We’re watching loss aversion, which is a cognitive investing bias play out. Loss aversion describes this idea that losses feel worse than an equivalent gain feels good.
One way or another, watching your investments lose value, especially this quickly sucks. Yes, it isn’t as bad as some previous sell-offs but let’s not play the comparative suffering game today.
Here are a few different things I review for myself personally when the market gets volatile:
Am I still comfortable with my risk tolerance?
The way some people are acting, you’d think they have the risk tolerance levels of a 90-year old. Risk tolerance is a cornerstone of long-term investing and is usually exposed when markets begin to sell-off.
No one had a problem being risk-on during 2023 and 2024 when the S&P 500 had back-to-back 25% gains.
A downturn of ~10% over the course of a few weeks and people are scrambling.
Having an understanding of your risk tolerance early on is important and if you made a mistake, this hopefully won’t follow you for your entire investing journey.
If this downturn is keeping you awake at night, it might be time to reassess your risk tolerance levels.
Do I still have a cash reserve in place?
It always comes back to the cash reserve. Having 6-9 months’ worth of expenses should be allowing you to sleep like a baby no matter the market environment.
All your needs should be covered in the event of a severe crisis for at least 6-9months. The cash reserve plays an important part in investing as it allows us to continue investing on a monthly basis without interruption, avoid selling the lows for liquidity and can even serve as additional funds for furthering investments depending on how much cash we actually hold.
Remember, we call it a cash reserve and not an emergency fund, as a cash reserve implies it can be used for emergency and opportunity.
If you are finding that there are layoffs at your company, maybe it is time to revisit or even bulk up cash a bit.
Am I maintaining a long-term investors’ mindset?
If you don’t plan on retiring this year, these short-term fluctuations shouldn’t be having too much of an impact on you outside of it just not being fun.
Risk is the price we pay for long-term capital appreciation. Pull-backs, corrections, bear markets and recessions are all normal things. This won’t be the first pull-back or correction of your career, I am confident in saying that.
Find peace in the fact that the stock market has a 100%-win rate at recovering from these events. It just might take some time.
I’ll leave everyone with this - I have nearly 0 confidence that anyone can time this market. Even less confidence that I could time this market.
But, some of the best days in the market happen after some of the worst and missing some of the best days can significantly impact your long-term returns.