Bill McManus | Mon Oct 12 16:45:00 EDT 2015
The market is volatile. Plain and simple. It has highs, and it has lows. It corrects, it plummets, it crashes, it rises. No matter how you dice it, the one thing you can always count on with the market is that it cannot be predicted. The problem is, however, that emotional investment decisions based on how the market is reacting today does not necessarily do us any favors for our future, as much as we may think we are doing the right thing by going for avoidance over endurance.
August 2015 was the worst showing for the S&P 500 and the Dow Jones Industrial Average in years, both dipping more than 6% (as of August 2015).1 That sounds bad, I know. But the consequences for making impulsive decisions born out of fear can have negative effects on our long-term investment success. We’re constantly talking about how volatility is ever-present in investing and offering guidance on how to assuage clients’ concerns during market corrections. But I thought that maybe investors need to hear it from someone else, someone bigger. I decided to start looking at market volatility through the eyes of historical greats. What would Honest Abe do?
What, then, is to be done? To make the best of what is in our power, and take the rest as it occurs.
Epictetus was born a slave in first century Hierapolis, Phrygia. He spent his youth in Rome working for a secretary of Nero, the fifth ruler of the Roman Empire with a supposed propensity for stringed instruments and arson. After obtaining his freedom, Epictetus went on to become one of the greatest Stoic philosophers in history.
Epictetus’ simple words remind us that while we cannot control market events, we can certainly control our own reactions. A harsh response to a market event will not change what has already occurred, nor will it “fix” what was happened. We should instead think about taking it in stride, letting it pass and riding it out. Our power is over ourselves, and the bottom line is, market volatility happens. So let it.
If the only tool you have is a hammer, you tend to see every problem as a nail.
Abraham H. Maslow
Abraham Harold Maslow was an American psychologist who was best known for creating Maslow's hierarchy of needs, a theory of psychological health predicated on fulfilling innate human needs in priority, culminating in self-actualization.
Maslow’s hammer quote serves a reminder that as investors, we have many tools. We are not limited to just one resource. As long-term planners, there are long-term opportunities for us to reach our ultimate financial goals. We do not need to pick one tactic and stick with it—we do not need to hit every problem over the head. Financial advisors should have a whole arsenal of options for their clients, so when making financial plans and decisions, you can survey the different options before determining the best course of action. Then you can choose to use whatever tools you have at your disposal that will get you closer to your desired outcome.
An hour sitting with a pretty girl on a park bench passes like a minute, but a minute sitting on a hot stove seems like an hour. That's relativity.
Albert Einstein came up with this comedic metaphor after repeated inquiries for him to describe his newly formed Theory of Relativity. But the fact is, every minute is 60 seconds, and every hour is 60 minutes. Those measurements are the same to everyone, but they might feel different based on what the observer is doing during that time—their perception might be distorted.
In the midst of severe market volatility, our perceptions as investors can be skewed. We will always face periods of market ups and downs, and the downs will always seem far worse when examined over a shorter period of time. Sometimes we need to take a step back and look at the bigger picture, taking in the information and realizing that a downturn is just one movement in one point in time. It seems big and catastrophic in the moment, but looking at the overall landscape of the market over a longer period of time may just show that the downturn that seemed so big was not really that problematic after all. The key to success is being able to make a plan and stick with it for the long term. Because everything is relative.
We can complain because rose bushes have thorns, or rejoice because thorn bushes have roses.
We can always count on good old Honest Abe to remind us to be optimistic. It’s the classic glass-half-full/glass-half-empty analogy. We can choose to look at the downside of a situation, or we can choose to turn the tables and find the silver lining.
It is easy to seek out negative information during times of investment anxiety. We are actually psychologically prone to do so. However, there are always reasons for optimism, and always positive shoots that we can look to for comfort. When the market goes down, don’t see it as a time to run. Instead, see the downturn as an opportunity to take advantage of buying at a discount, if the strategy fits in with your overall financial plan. While other people jump ship during a downturn, hunker down and hold tight—a downturn means there will be an upswing eventually. You just have to see that rose among the thorns.
1 Marketwatch, “Dow posts worst August decline in 17 years,” Aug. 31, 2015, www.marketwatch.com