Stock market sentiment can change really fast in a matter of days and volatility may spike immediately creating a roller coaster in stock prices. Managing our emotions when the market is regularly changing direction is vital for long-term investing success.
We lived that on our skin in the first months of 2020 with the big sell-off that followed the coronavirus outbreak and the high levels of volatility. The virus was around since the last months of 2019 but the risk was suddenly priced by financial markets creating an important crash.
One day investors are bullish, the other day are tremendously bearish (“capitalism is ending! get the heck out of here!”), the next day everyone bets on a fast crisis and a V-shaped recovery looking for the possibility of the economy reopening and consumer spending bouncing back to pre-coronavirus levels.
Investing in this set of market conditions can be a difficult task especially, if you are exposed to the day by day financial news that are mainly helpful to increase the level of uncertainty.
That’s why approaching events with the right mindset and focusing on your long-term goals might be the most effective way to navigate the challenging times that sooner or later we are all going to encounter.
Focus On Why You Are Investing
When they start, many investors have a clear image of what they want to achieve through their investments and their portfolio.
Everyone has his own goals, it might be the creation of a retirement fund, sending children to college, financial freedom… whatever the goal is, that’s the reason why you are taking some risk in the market.
However, changeable market conditions bring investors to completely loose the focus on why they started to invest, forgetting the main goal.
Don’t Miss the Real Investing Goals
Investing in financial markets should be considered a way to reach your investing and financial goals. Markets should not be considered a place to look for the big event that will turn things around and change your life forever.
This also works the other way around. A market drop doesn’t cancel the possibility to reach your goal provided that you do not overreact to it (e.g. panic and sell everything).
Whatever your investing goal is, is never to “avoid the crash” or “getting an extra x% return” (by the way, taking more risk).
You are much more relevant to your investing returns than financial market movements.
Many investing mistakes are made due to emotional reaction and lack of planning. Instead of trying to time the market, remembering what you were really trying to do in the first place when you started can be much more helpful and useful.
Financial Market Conditions Always Change
This is a fact and that is not a problem by itself. It can even be an opportunity that allows you to take advantage of market volatility if you arrive prepared and take advantage of undervalued stocks.
It becomes a problem if market movements generate excessive emotions that change your outlook on the stock market to quickly switch from positive to negative, and vice-versa. When this happens, it really impairs our ability to be consistent and results into an obstacle to reach long-term returns.
Everyone is different, realize how those events make you feel and try to frame events considering a bigger picture, this will help to keep calm and stick to your plan.
If your goal is for the long-term, your thinking and your actions should be for the long-term. A short-term focus doesn’t lead to long-term profits.
By focusing on your long-term goals and defining an investment strategy you may find it easier to look beyond the short-term volatility without exposing yourself to a much bigger risk than a stock market crash, the only risk that you should care about: not reaching your goal.