Inner strength – lessons to learn from volatility

With all this uncertainty in the stock market it can be very unsettling and tests even the most hardened investor. My mailbox is being bombarded by messages from investment blogs/companies – saying “it is a buying opportunity”, “is this the time to sell XXX”, “Should you sell now and get out of the market”, “what to buy while the stock markets are low”, “sell X now and buy Y”, etc….

They are out to make their money whatever the state of the market. There are a few things that seem clear, volatility is normal and to be expected. We need to understand this and not emotionally react to the sea of red when stocks drop. It is a hard lesson to learn: how to relax, keep your head and understand where your risk thresholds are.

As someone who is drawing on my FI pot at the moment, seeing its value drop below the “enough” marker is unsettling. If you are someone who is still earning and on your FI path, you see this as an opportunity to buy and invest in stocks at a lower price and if all goes well, ride the increase in value over the long term.

You start to view your stock portfolio carefully and scrutinize the shares – “Have I picked the right companies?”, ” Do I have the right balance?”, “Am I feeling worried and disturbed by the loss in value?”. “Should I cut my losses?”.

Maybe its time to re-evaluate your risk profile first. Are you prepared to ride out the storms and accept the risk? The biggest risk is your emotional self. It is the hardest part of this path and in life, making a decision and accepting the risks and understanding the consequences. It applies to all part of your life, all the choices you do or don’t make. Only you are responsible for the decision you make. You cannot blame and sue others for your mistakes – well you can try and plenty in the US do. Ultimately decisions are down to you.

If you panic, you could possibly be in a worse position than if you carefully considered your options and take your time. A rash decision could take its toll and you could look back later and wonder why you did it. You need to learn from this and understand yourself and what you are happy to accept as the outcome.

Look at your contingencies, if you haven’t got any, then look at creating some. Evaluate your risks and options to cover them. What does volatility mean to you? What would it mean financially? What would stop you thinking this way? Do you need a cash pot / bonds / stable stocks that are not affected by the current volatility?

Start that personal profile review, identify the risks and what you need to do to mitigate them.

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2 thoughts on “Inner strength – lessons to learn from volatility

  1. Sounds like very wise advice. The broker companies are indeed out to make money whether the market is going up or down, so now is obviously no exception to that.

    It makes sense to evaluate yourself on an emotional scorechart so to speak, asking yourself a few questions like ‘how would I react to “x”?’. This will give you some pointers as to your risk tolerance in many different areas of life, if you apply the questions to your relationships, money, work, etc.

    On the markets, ss I’m still building my positions, I am looking at this as a great opportunity. I’m just hoping it lasts until 23rd when I am making my regular monthly purchase.

    Cheers

  2. Nate Silver has an amazing post on his 538 website, identifying exactly why one shouldn’t be panic selling (it has a chart and everything). It’s interesting to hear about this from the point of view of someone already over the line. I think that my attitude to risk will change as and when my ability to work and/or adapt changes, rather than after I stop working. But who knows what will change my mind

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