Market volatility is an inevitable part of investing. Prices rise and fall, often unpredictably, driven by economic changes, geopolitical events, or market sentiment. For many investors, this can be unsettling, leading to emotional decisions that may undermine long-term financial goals. However, understanding how to navigate volatility with the right mindset and behavior can transform it from a source of stress into an opportunity for growth. Here are two key principles to guide you:

Volatility is an expected expense, not a penalty

Market participation comes with its costs, much like any worthwhile endeavor. Viewing volatility as an "expense" for the potential of long-term gains can help reframe your perspective. Think of it as the price of admission to the world of investing—a world that historically rewards patience and discipline.

A "penalty," on the other hand, implies punishment, which can lead to regret or fear. By accepting volatility as part of the process, you can focus on the bigger picture: the growth potential of your investments over time. Remember, the market has consistently rewarded those who stay the course, even through turbulent periods

You pay for quality in every other area of life, and investing in the market is no exception. Nothing worthwhile comes without a cost.

How the Strategy Works in Practice

Here’s an example of how hiring your child can benefit your business and family:

• You own a small consulting firm and hire your 16-year-old to manage your social media accounts for 10 hours per week at $15 per hour. Over the course of a year, you pay them $7,800.
• The wages are deductible for your business, reducing your taxable income.
• Your child uses the earnings to fund personal expenses, contribute to a Roth IRA, building tax-free retirement savings, or contribute to a 529 college savings plan.
• Because their income is below the standard deduction, they owe no federal income tax.

Temperament over Intellect

Success in the market stems from temperament, not intellect.

The ability to remain calm, disciplined, and consistent in your approach often outweighs the need for complex strategies, predictions, or action. Emotional reactions, such as panic selling during downturns or chasing high-performing assets during booms, can be detrimental.

The psychology of panic selling makes sense and is a natural reaction to market volatility – avoid danger and losses! However, history demonstrates that markets typically recover after downturns, making it unlikely for investors who sell during these times to benefit. Just recently, we’ve seen this to be true in the dot-com bubble, 2008’s financial crisis, and the COVID-19 pandemic.

According to a study by Baird, the US-based financial advisor, the annual return of the S&P 500 between March 1995 and March 2020 was around 7%. But if an investor missed the best twenty days of that period, their return would be only around 2% per annum. Data shows that the best days for investors tend to fall in the middle of bear markets, which requires staying in the market.

The answer during volatility is to focus on behaviors that align with your long-term goals:

• Stick to your plan: – A well-thought-out investment strategy accounts for market fluctuations. Trust the process.
• Avoid Timing the Market : Predicting short-term movements is nearly impossible, even for seasoned professionals. Focus on time in the market, not timing the market.
• Diversify Your Portfolio: A diversified portfolio can help mitigate risks and smooth returns during volatile periods.

Volatility doesn’t have to be a roadblock; it can be a steppingstone. By viewing it as a fee for long-term gains and prioritizing disciplined behavior over reactive decisions, you can navigate uncertainty with confidence.

Sources

“In the Markets Now–Best of Times, Worst of Times,” Baird, accessed 10 November 2022, Click the%20Markets%20Now%20-%20Best%20days_%20worst%20times.pdf

Note: This blog post is intended for informational purposes and should not be construed as financial advice. Always consult with a professional regarding your specific circumstances.