Photo: Raj Vitthalpura. Source: Free Range Stock Photos
It’s easy to freak out when you see how volatile the market has been, lately. One day the market is down 3%, the next it’s up. Yesterday the Dow was down over 500 points in the morning. Traders were freaking out over the prospects of a trade war. By the afternoon, folks had calmed down and the average was up a couple hundred points. How do you avoid panicking with the pack and selling when the market’s down? Or getting manic and jumping in at higher levels?
One approach is to just ignore the madness. Turn off the news and go for a walk. Don’t bother to open your brokerage statement. Tuning out has an honorable pedigree: Calvin Coolidge is reported to have said that if you see ten troubles coming down the road, you can be sure that nine will run into a ditch before they reach you. Then you only need to wrestle with one. Ignoring the market’s turbulence will help you avoid premature activity. It’s our rash actions that most often get us in the most trouble.
But a better approach is to use the market’s volatility for your own benefit. Plan what you will do if and when the market reaches certain levels. First look at the economy: still growing? Check. Then look at corporate earnings: still healthy? Check again. Evaluate the fundamentals in some objective way. Be careful when you read daily commentary – even this humble offering. Those writers can spin tales that seem to explain the news of the day, but really are little more than “Just So Stories” – fanciful yarns of how the leopard got his spots or how the rhino got his skin that are more entertainment than explanation.
Woodcut from Kipling’s “Just So Stories.” Public Domain. Source: Wikimedia
If the fundamentals are sound, then set some levels and decide ahead of time what course to take. “If the Dow falls to 22,000 I’ll to this; if it falls to 18,000 I’ll do that.” Have a plan for what to do and when to do it, and remind yourself periodically of your strategy. Planning is the opposite of panic: one approach is deliberative, the other is spontaneous; one way is proactive, the other is reactive. One way is usually profitable, the other not so much.
We can’t control the market and we don’t know the future. But we can control ourselves: what we do, how we react. By expecting the unexpected and keeping calm in the midst of chaos, we can help ourselves – and maybe even those around us – when turbulence and tweet-storms seem to rile things up.
Douglas R. Tengdin, CFA