The Dow Jones Industrial Average gained 25% in 2017. It was a good year, but it was also one of the quietest years for stocks since 1964. The volatility or the day-by-day up and down fluctuations of the market was the lowest in over 50 years. The average daily point move in the Dow was 60 to 80 points a day. That’s not much when the DJIA index is at 24,000. This kind of steady gain in the markets makes investors comfortable and happy.
It has been a different story in 2018. The gains and losses this year have ranged from down over 1,000 points to up 400 points. Investors are no longer so complacent. Many are anxious and worried. I don’t know what the market is going to do in the future, and by the way no one else does either. But taking the short term view, reacting to the daily news, acting on feelings and dire predictions is not the way to make investment decisions. So how should investors handle stock market volatility?
Stick to your plan. Most of you right now are saying, what plan? How can you plan for the unknown? The key to surviving market volatility (losses) is to have a plan. If you don’t have a plan you will be more likely to panic and make mistakes that cost you dearly. Your plan should include how much of your savings you are going to invest in stocks taking into account your goals, your timeframe and your capacity for risk.
Stay invested. Without a plan you will sell stocks when the news is bad and stocks are down and you will buy when the market is doing well and prices are up. This happens all the time. People get anxious and nervous when the stock market is volatile. No one likes to “lose money” but that is the nature of markets. Sometimes you lose money on paper. Fear and anxiety cause the emotional portion of your brain into the “fight or flight” mode. You have to get away from the danger and you sell. Instead of acting on your emotions stop and think about it. Has this happened before? What happened the last time this happened?
Here is one example. Nine years ago the market (DJIA) dropped from around 13,000 to 6,600. That’s a drop of almost 50% which would be like a drop of 12,000 points today. Has this happened before? Yes. What happened then? The stock market went from 6, 600 to 26,000 in the next nine years. The stock market has always recovered. Why would this time be different?
Stay diversified. Don’t try to make bets on different strategies just because the market is volatile. Too many times investors will stay invested but start concentrating their stocks in different investments trying to be more defensive. The more diversified you are, the more spread out you are over different types and sizes of companies the less danger there is of you making a really big mistake by picking the wrong investment.
Don’t try to time the market. Some investors believe they can anticipate stock market declines. If you listen to the pundits on the web or on TV you probably think it is possible. But in my experience no one makes money consistently by jumping in and out of the stock market. You might get lucky once but you have to be exactly right and predict the future every time for it to work. If someone really could predict the future of the stock market why are they out there giving you advice?
Don’t be passive be proactive. There are two ways individual investors react when stocks are volatile. One way is to ignore everything and not open their statements. The other way is to panic and sell. Just selling everything is being reactive. You need to look at market volatility and downturns as opportunities and be proactive. How you are going to react to market fluctuations should be part of your plan. Don’t bury your head in the sand and don’t have a meltdown. When stocks go down significantly buy some more. Think about it. Ask yourself the question, what happened the last time this happened?
Bill Oldfather is a fee-only financial planner and investment advisor. Oldfather Financial Services is an SEC Registered Investment Advisor based in Kearney NE. Email to bill@oldfatherfinancial.com