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Market Volatility and Your Emotions

August 31, 2011 by Contributor filed under Amy and Dan Smith, Columns No Comments
Amy Smith-BRL

“Market volatility: period when financial instrument prices fall quickly or go up by an unusual amount.” That’s a dictionary definition. Mine is more like the “I’m going to be sick” feeling that usually accompanies a roller coaster ride at my daughter’s favorite theme park. Unless you’ve not been checking your emails, reading newspapers, or watching television (a.k.a. “vacation”), you know it’s been a bumpy ride the last few weeks, and some financial experts say it might be like this for a while.

Here are some things you might want to consider before F.E.A.R. (False Evidence Appearing Real) kicks in:

  1. Don’t Panic: No matter how careful you are, you can neither predict nor control the future. No one has a crystal ball.
  2. Know what you own and why you own it: When the market goes off the tracks, knowing why you originally made a specific investment can help you evaluate whether those reasons still hold and whether a lower price might actually be a buying opportunity. It is individual stocks that determine the market, not vice versa. Buy value, not market trends or the economic outlook.
  3. Tell yourself this too shall pass: The stock market is historically cyclical. There have been a half-dozen previous bear market cycles-declines of 20 percent or more since the early 1970s.* It may take a while, but the market has bounced back every time. Even in the midst of the Great Depression, there were short-term rallies and trading opportunities. In some cases, people built fortunes over time by investing carefully just when things seemed bleakest. Remember, past performance does not guarantee future results.
  4. Have a game plan: Setting predetermined guidelines that recognize the potential for turbulent times can help prevent your emotions from dictating your decisions. If you decide that you need to re-examine your game plan, it should be done with as much care as you put into developing that plan in the first place.
  5. Diversify: Remember that everything is relative. Asset allocation is responsible for most of the variance in portfolio returns. If you’ve got a well-diversified portfolio, it could be useful to compare its performance to relevant benchmarks. Just because a particular index may have dropped doesn’t mean your entire portfolio is down by the same amount. Even when everything seems to be struggling, some asset classes may be struggling less than others. Diversify by country, by industry, by risk. In stocks and bonds, as in much else, there is less volatility in numbers.
  6. Remember your road map: If you feel you need to make changes in your portfolio, there are ways to do so short of a total makeover. For example, each month you could slowly put a set dollar amount into an investment you think is well positioned for the future (known as dollar-cost-averaging). Though all investing involves risk, there are many ways to pursue your long-term investments goals.
  7. Learn from your mistakes: The only way to avoid mistakes in my opinion is to not invest, which is the biggest mistake of all. Forgive yourself for your errors. Don’t become discouraged and certainly don’t try to recoup your losses by taking bigger risks. Instead, turn each mistake into a learning experience. Determine exactly what went wrong and how you can avoid the same mistake in the future. One of the biggest mistakes people make is putting too much money into fixed-income securities. Invest for maximum total real return. This means the return on invested dollars after taxes and after inflation. It is vital that you preserve purchasing power.

So, turn off your television occasionally, be patient, and try not to be too fearful. There will of course be corrections, perhaps even crashes or recessions, but for more than 100 years, optimists have carried the day in the stock market. As the global economy recovers, wealth will increase and stock prices should rise accordingly.

I welcome your comments. Just send me an email at Amy.V.Smith@RaymondJames.com. All names and identifying information will be kept strictly confidential unless written permission is given for their use.

*Source: Stock Trader’s Almanac 2011 © Amy V. Smith
Amy V. Smith Wealth Management, LLC, is an independent firm. Amy is a Certified Financial Planner (CFP) and Certified Investment Management Analyst (CIMA) and offers securities through Raymond James Financial Services, Inc., member FINRA/SIPC. Her office is located at 161 Fort Evans Road, NE, Ste 345, Leesburg, VA 20176.
The opinions and recommendations here are those of the columnist.

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