No doubt about it, at times the stock market is a tough place to be. Volatility—the market’s up-and-down price swings–feel more pronounced daily, weekly, and even month-to-month. Turns out that higher market volatility is the new norm, and will likely be with us for a while.
It is all too human to lose focus on our long-term goals and start to fret about the short-term state of affairs. Recency bias is the tendency to think that trends we observe in the recent past will continue in the future. Classic example, the stock market experiences a downturn and our brain tricks us into thinking that it will keep going down – totally forgetting the long-term pattern of the markets.
The financial-news-media doesn’t help; filling its 24/7 broadcast-networks with numbers, predictions, and ‘expert’ opinions. It’s harder to separate what matters from what doesn’t and, the simple fact is, the majority of business-news has become ‘noise’. Under a continuous onslaught of noise, though, we quickly forget that these ebbs and flows–although sometimes extreme–are a natural part of the unpredictable nature and mood of the stock market. This time is not different.
So what do you hold tight to during volatile times in the market? It helps to remember that volatility is not the same thing as true investment risk. Short term markets trade on fear, greed and investors’ sentiment often more than on the underlying economic fundamentals. You do not experience a loss of buying power of capital from these fluctuations in securities prices.
Today’s compressed interest rates oppose most investors’ desire for stable returns. Unfortunately, potentially higher and required rates of return come with more variability of return. As long-term investors we voluntarily participate in the market. Remind yourself that this is (again) a short-term bump in the road and resist taking a costly detour.