HOW TO DEAL WITH MARKET VOLATILITY
We all have different risk tolerances; some of our risk aversions are similar to other peoples’ although not identical. Our investment risk tolerances are based on our unique perceptions. So how do we move through these current market conditions?
One way is to think of market volatility is that it is the fee we pay for long-term investing. We all know the market is not going to go straight up, although that jagged line has trended up tremendously over long time periods. For many, when we look at our portfolio account balance in 2022, we instantly go to ‘Wow, its down X amount since the last time I looked at it.” Your next thought should be well, this is the part of the jagged line I don’t like, but I know every company I own part of (equities) or that I lent money to (bonds) is not going to go out of business and (hopefully) I don’t need to sell them now to cover my living expenses.
For many, the psychology of owning securities is different than it is to owning real estate. For example, if the market value of your house went down, your initial reaction wouldn’t be I need to sell my house in case it goes down in value further. This is because your house has utility value to you today, so that prevents this reaction. The knee jerk reaction to securities is different because you do not feel the utility value of this asset class today. Securities mostly have a future utility value to us, therefore it is imperative that you think of your future needs, such as your future living expenses when the paycheck stops, charitable gifts, and bequests.
Many savvy investors expect this unpleasant part of the market cycle. What do they know, and more importantly what are they doing? They are sticking to their plan of make systematic investments by continuing to buy securities in all market cycles. For the same amount of cash, they are now able to buy more securities than they could a year ago because generally share prices are lower now. This is like catching a good sale on something you know you want and need.
Remember, unless you sell a security for less than you purchased it, you have not recognized an actual loss. You may have what is called a “paper loss” on the books now, not an actual loss. No one intended to buy high and sell low. The fear that causes the impulse to engage in market timing creates two implementation problems, selling in a bull market and worse yet, missing the largest part of the recovery. Basically, you must get something very complex right, two times in a row! For most of us it’s best to ride it out down markets while remembering this is a long-term strategy.
Its different if you are already in retirement and need to cover daily living expenses with your portfolio. In this case, now is when you use the cash reserves component of your portfolio. This part of the market cycle is what your cash reserves are intended to cover. For further refinement, now is a good time for retirees to review discretionary expenses and possibly defer these until the market recovers and some ripe equities can be sold to first replenish the cash reserves and then resume reasonable discretionary spending.
Changing our perceptions of market volatility can make a big difference in successfully achieving our long-term financial goals.