The stock markets since the start of this year have been violent and volatile. They bounce up high one day and come down with an emphatic thud the next. It is a situation caused by a cocktail of a multitude of factors, both local and global. After the joyride of 2017, this year feels like a rude awakening for most investors. It is akin to being on a cruise ship which sailed smoothly on serene seas last year and being caught in a violent storm from out of nowhere this year.
But every cloud has a silver lining. The silver lining here being, that you are the captain of your ship (your stock portfolio), so it is still you who calls the shots. I am now going to share a cheat sheet of pointers for volatile times like these which will stand you in good stead for the potentially volatile year ahead.
Prior Preparation: As with everything else, dealing with volatile times involves preparing for them in advance. The vision to discern the first signs of trouble, the sensibilities to understand the impact of the adverse factors, and the ability to discipline investment behaviour accordingly will definitely give one a leg up over other investors.
The first signs of deterioration in economic conditions which have led to the current situation, reared its head toward the latter part of 2017. Those who saw this and prepared for it would definitely be in a better place now than those who didn’t.
Mental Calmness: The first signs of volatile times see most investors panic like an irreparable crisis has hit them. Investors hastily and mindlessly run for the hills, looking for the slightest bit of cover to hide their heads. But every crisis, whether apparent or real, also presents an opportunity.
A cool and calm mind helps one spot the opportunity in the midst of a crisis that everyone else is missing out on. Always remember that an emotional mind cannot find a solution to even the easiest problems, and a calm mind can find a solution to even the toughest. Hence, those with a calm mind will be able to make the most of the opportunities left for them by those with more chaotic minds.
Clear Perspective: Once you have a calm mind, you will be able to look at the situation in a better light with a clear perspective. Perspective kills panic. Let me elaborate. First, stock markets come with the built in caveat of volatility, 2017 was just an unnaturally non volatile year.
Second, volatile times this only last for a few months or years at a time. A serious investing career goes on for decades. A few volatile months or years here and there on a timeline of decades is almost nothing. It is only because we look at things with a short term perspective, that everything seems so painful and irreparable. Extrapolating volatile times over the long term will make them seem insignificant.
Third, volatile times are not as bad for some companies as they are for others. So understand the impact of the volatile times on the stocks in your portfolio, and if they have been beaten down a lot more than required thanks to all the panic around, treat it as a fantastic opportunity to buy more of your favourite stocks at dirt cheap prices.
Strength Of Conviction: Volatile times are the biggest and best tests of the strength of an investor’s conviction in his investment beliefs and his portfolio. If the strength of the conviction you have in your portfolio and your beliefs is genuine, you will have the gumption to hold on through volatile times and maybe even add to your positions if attractive opportunities present themselves.
One’s own conviction is always the strongest. That is why it is always important to base your investment decisions on your own research rather than borrow conviction from other sources, and to not change one’s investment beliefs during tough and testing times.
Being Unattached To Profits And Capital: Investors who get emotional about their returns and the money that they put into the stock markets, have no chance of being successful investors. Remember that unless you actually book yourself out of your positions, your profits are just green numbers on a computer or mobile phone screen and your losses are just red numbers on a computer or mobile phone screen.
So it is irrational for an investor to be delighted when there is a huge unrealised profit, or to be panic stricken when there are huge unrealised losses and get emotional about coloured numbers on digital screens. Being unattached to profits and capital is therefore one of the most important weapons that an investor should have in his arsenal at all times, and this is especially true during volatile times.
Stomach For Short Term Losses: Volatile times inevitably see investors lose both profits and capital in the short term. An investor who has a stomach strong enough to digest these losses and can understand that they will be more than made up for in the long term will undoubtedly reap the long term gains of their near term pains.
Ability To Block Out Noise: Highly volatile and highly profitable times are the two situations where the advisor inside every investor suddenly wakes up from out of nowhere. During these two situations, there is no dirth of opinion available, and they come from all possible sources - financial news channels, financial newspapers, so called stock market experts and analysts, social media, not to mention friends and family.
With so many cooks waiting to spoil an investor’s broth, it is best for an investor to be completely oblivious to the many cooks and focus on making the broth of his portfolio himself. Heeding to the many opinions will only leave an investor more confused and indecisive than before.
That’s that for this cheat sheet on how to stay calm and deal with volatile times. Keep these simple pointers in mind, and no matter how volatile or choppy the markets get, you will still be able to, quite easily, achieve superior investment performance.