Level heads will prevail in this extraordinarily volatile market. Here's how to stay calm when stocks seemingly go crazy.
May 15, 2022
It seems an understatement to say that U.S. stocks have had a rough go so far in 2022. The S&P 500 index is down 16% year to date as of this writing. The Nasdaq Composite Index has fared even worse, down more than 25% since January 1 with roughly half of all stocks listed on the tech-heavy benchmark having fallen 50% or more from their peaks.
The angst among investors is understandably palpable. For many who began investing over the past several years, this is the most substantial decline they’ve ever experienced. And make no mistake: The pain of losing money — whether from stocks you’ve sold at a loss or from unrealized losses in those you’re still holding — hurts far more than making money feels good. (There’s a name for this behavioral phenomenon, by the way! We call it loss aversion.)
To be clear, I certainly don’t want to minimize the very real anxiety investors are feeling over this volatile market. But in the world of stocks, keeping a level head in both good times and bad is absolutely crucial to achieving success over the long term.
Here are 7 tips for doing exactly that:
At 7investing we focus on the long term. We strive to buy and hold promising stocks for periods of at least three years to allow their theses time to play out.
In fact, two of our seven core investing principles at 7investing revolve around focusing on the long term: #3: Don’t stress yourself out, and #4: Time is on your side. And when we launched 7investing on March 1, 2020 — unintentionally a few weeks prior to a steep COVID-driven market pullback — we wrote:
It’s difficult to predict what stocks will do in the next few months, since headlines tend to affect investors’ emotions. But the impact of those short-term news stories rarely lasts, whereas great business execution can endure for decades. Extending your timeframe will maximize your likelihood of generating better returns. […] Investing is meant to be a long-term wealth-creating process, not a day trip to a Vegas casino. Setting your expectations upfront of saving for long-term goals will greatly improve your chances of success.
Stocks are tied to businesses, and businesses need time to grow. Like Einstein, we believe compound interest is one of our world’s true wonders, capable of building incredible wealth over sufficient time. When buying and holding individual stock positions, time is the individual investor’s greatest advantage. There’s a lot of money chasing after short-term results, and many investors are obsessively focusing on just the next quarter’s earnings. We recommend taking the long-term view instead.
If you scroll further down on our investing principles linked above, you’ll see that our seventh and final investing principle is to “develop a thesis.”
Sure, it seems silly that we need to explicitly state as much. But too many investors buy stocks without formulating a proper thesis that explains exactly why they’re investing in a company, as well as the specific things that will tell you if that company doing well or poorly.
In times of outsized volatility, returning to your thesis is crucial to determine whether the reasons you bought the stock in the first place are still intact. Revisiting your original thesis proves invaluable toward informing your decision on whether to sell, to continue holding, or even to buy more of any given stock.
That’s also why, at 7investing, we provide members with comprehensive reports outlining the thesis for every stock we recommend. Our theses include everything from what the company does, why we believe it’s a good investment, what’s happening in the bigger picture, management and vision, key risks, thoughts on valuation, and any specific metrics we should be watching along the way.
Rather than checking your portfolio daily or, worse yet, multiple times throughout the day — a habit that can wreak terrible havoc on your state of mind as an investor — consider touching base less often. Perhaps a weekly, monthly, or even quarterly check-in might be more appropriate (and you’ll sleep better for it).
One fantastic analogy comes to mind from my August 2020 podcast with “100 Baggers” author Chris Mayer. Around the 23-minute mark, Chris told the story of his friend who bought a painting for $15,000, hung it on his wall, and was surprised to learn 20 years later that it was worth $800,000.
Chris elaborated:
He was telling me the story. I remember he said, well, if somebody was there every day giving me the price for what that’s painting’s worth there was no way he would have just left it there for all that time. Because they would have certainly been a time where you’ve been, like, “Wow. You know, it’s worth 10-fold what I paid, get rid of it!” Or times where it was up tenfold and then maybe came back down. He’s like, “Well, you get rid of it now.”
That’s not to say, of course, that we should buy stocks and then not check them for 20 years! To the contrary, it’s important to keep tabs along the way to ensure the businesses underlying your stocks remain on track with your thesis. Signing up for email alerts for quarterly earnings calls, SEC filings, and press releases on the company’s investor relations page goes a long way toward helping you stay in the know.
In any case, we could do well to invest more like an art owner, removing the psychological impact of checking the value of our equity holdings too often.
If you follow me on social media, you’ve likely seen me post some variation of this thought:
Don’t fret if shares of the companies you’ve bought decline after you open a position.
In fact, assuming it wasn’t some thesis-breaking development that caused the drop, celebrate it as a chance to add to your position at lower prices relative to the stock’s long-term potential.
— Steve Symington (@7investingSteve) March 21, 2021
To be sure, as a long-term shareholder who tends to buy multiple lots over time of each stock I own (see this article for more on the topic of allocation and portfolio building), I’m happy to see the share prices of my favorite stocks temporarily pull back from what I believed was an already attractive valuation. This gives me a chance to add to my position at lower prices, further spurring my long-term performance when those stocks ultimately rebound.
Here again, however, I should reiterate that not all pullbacks should be celebrated — especially if the pullback was precipitated by a thesis-breaking event. In this case, I’m talking about pullbacks in shares of great businesses that have continued to deliver solid results, or those that are merely facing temporary headwinds that will be resolved in a reasonable amount of time.
I include this one cautiously as someone who personally consumes more than his fair share of financial news. But I’d remiss if I didn’t suggest tuning out the financial news media for anyone who’s having trouble keeping a level head in volatile markets.
All too often major financial news outlets publish headlines that thrive on sensationalism and quick takes that tend to ignore important details that must be considered to make logical investment decisions. And given the many ad-hoc ways we, as consumers, can easily find news on specific topics these days (with a simple web search, for example), the talking heads in financial news media often risk not only sewing unjustified seeds of doubt, but also confirmation bias as we tend to place outsized focus on opinions that coincide with our own.
At the very least, tread lightly with most mainstream financial news outlets, viewing any news or opinions with a critical eye until you’ve done your own due diligence.
This might feel like little consolation amid the recent historic market pullback, but it helps me to remember that broader-market volatility is more normal than most people think.
After all — historically speaking — the most widely followed stock market indices typically fall by around 10% from their peak at least once per year, 20% every five years or so, 30% once per decade, and 50% a few times per century.
Here again, today the S&P 500 stands just over 16% below its late-2021 peak, while the NASDAQ index is down more than 27% from its all-time high. Many previously high-flying growth stocks are down 70%, 80%, or even 90% from their peaks in Dot-Com-crash-esque fashion — in some cases despite continued solid growth and progress from their underlying businesses as broader valuation multiples have contracted.
Opportunities abound for those who remember these pullbacks are more “normal” than you might think. And I firmly believe fortunes will be made in the coming years if we invest accordingly.
Finally, there’s nothing quite like a historic drop to test your risk tolerance and ability to weather volatility — even if that volatility is par for the course when investing in higher-risk (and potentially higher-reward) stocks. Drops like these feel terrible, and perhaps you’ve realized along the way that you simply don’t have the stomach for it!
I’m personally elated to have the chance to add to some of my favorite growth stocks at what I believe are depressed prices today. But there’s no shame in adjusting the risk profile of the stocks you’re willing to own going forward in order to lower the volatility of your portfolio. That’s why at 7investing, our scorecard gives members the ability to filter the stocks we’ve recommended by Risk Level, ranging from “Low Risk” to “Moderate Risk,” “High Risk,” and “Very High Risk.” The lower-risk stocks on our scorecard tend to put a lid on the absolute returns we might expect relative to their “Very High Risk” counterparts over the long term. But they’re also far steadier options perfect for the risk-averse investor.
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