There is no shortage of sayings about the stock market. Some of my favorites include:
"The market can stay irrational longer than you can stay solvent."
"Stocks take the stairs up and the elevator down."
“Time in the market, not timing the market.”
What all these sayings have in common is that they refer to how challenging it can be to invest in stocks because stocks are unpredictable over short periods of time.
Dealing with stock market volatility is one of the greatest challenges that most investors face. When markets are swinging widely, investors can fall prey to either fear or greed. Neither are helpful and both can do a lot of damage over time.
What is an investor to do?
I have a few tips and tricks for you on this month’s edition of Wealth Management 101.
Have a plan
One of the best tools for surviving rough markets is having a Financial Plan.
“But Sarah, when the world is on fire, what good is a plan?”
A carefully crafted plan will have already accounted for regular bouts of volatility. The biggest unknown in any Financial Plan is the day-to-day and year-to-year differences in stock market returns.
What is Financial Planning?
The planning software used by professionals like me accounts for these fluctuations so that periods of poor returns and losses are already “baked into the cake”.
Knowing that you’ve already planned for bad markets can help you stay invested when the world looks scary.
It will also help your Financial Advisor set you up to weather bad markets long before they occur by helping you choose investments that fit you.
Know your risk tolerance
Every investor has their own ability to tolerate risk.
Some investors are very risk-seeking and might own nothing but risky stocks.
Some investors are very conservative and might have only 10 to 20% of their money invested in stocks with the rest in more stable securities.
Some investors are in the middle with some money in stock and some in bonds and cash.
What is Risk Tolerance?
Knowing where you are on this spectrum of risk tolerance is a key part of weathering bad markets.
If you are a moderate investor but you have all your money in risky stocks, you are almost certain to panic and sell when things look scary. This will destroy wealth and make it difficult for you to buy back into the stock market in the future.
Only take the risk you can tolerate.
Have a strategy
Once you have a Financial Plan and you know your risk tolerance, you can craft an investment strategy that fits you.
That strategy will dictate how much of your money will be invested in stocks, how much in bonds, and how much will remain in cash.
That strategy will also dictate the kind of stocks and bonds you’ll buy. Different kinds of stocks act differently in different environments. Same goes for bonds.
A carefully thought-out strategy that fits you can help you stay focused when stock markets quake. After all, your investments will be tailor made for you and designed to act in ways that will help you stay invested.
Focus on what you can control
When you invest in stocks, there are many factors that are well outside of your control. You cannot control government policy, the news, geopolitics, or the actions of other market participants.
You can control the amount of risk you take, the investments you choose to own, and how you react to bad news.
Be a discerning news consumer
One of the biggest mistakes I see some investors make is watching, reading, and consuming too much news.
This is not to say that you should bury your head in the sand and never watch or read the news.
I am saying that there is such a thing as being too informed and too plugged in.
Choose news sources that avoid alarmist reporting designed to provoke a strong emotional reaction. They are not there primarily to inform you, but to inflame you so you’ll keep looking. If you’re looking, they can sell more advertising and make more money.
Also, limit the amount of time you spend consuming news. That means limiting doom scrolling and trips down internet rabbit holes.
Being an investor has become somewhat of a necessity in our modern world. There are many ways to be an investor and investing in the stock market isn’t for everyone.
If you’ve chosen to be a stock market investor, guard your long-term success by having a plan, knowing your risk tolerance, having a strategy, focusing on what you can control, and being a careful news consumer.
Having a Financial Advisor can help too. Financial Advisors like me are here to talk you through the bad times and keep you on track in the good times. I feel that it’s one of the most important parts of my job.
Want to learn how a Financial Advisor can help?
Book your Free One-Hour Consultation now!
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