Do you remember the last time you were in your car and a song came on the radio that you didn’t like? And I don’t mean a song that was okay, but not one of your favorites. I’m talking about a song you really didn’t like. Maybe it was the song that was playing when the love of your life broke up with you or after your dog died.
Well, if you’re like me, rather than suffering through the next 3 ½ minutes, you probably solved the problem by changing the station. Simple solution for a common problem, right?
There is another problem we’re all experiencing right now. It’s called stock market volatility.
Stock market volatility has been nearly absent for many, many months, (see my article “Should I Be Worried About the Volatile Stock Market?”), but now it’s back with a vengeance.
Wouldn’t it be nice if we had a strategy to help us deal with stock market volatility?
Calm, confident and composed is the way I’d like you to feel no matter how much the Dow Jones is up or down. Believe it or not, this goal is probably within your reach and it only takes a couple of simple steps.
I think it all begins with understanding some truths about stock market cycles.
First of all, did you know that the stock market has never crashed without recovering and going on to new highs? Never! That is simply the nature of the stock market. In fact, if you look at the graph below, you’ll be able to see the bigger picture of just how powerful and persistent stock market cycles have been.
What you will see is that good markets last far longer and go up much higher than bad markets go down. In fact, since 1924, while the average bad market has gone down 41% over 1.4 years, the average good market has gone up 480% over 9 years.
So, the question is, how can you possibly lose money in an environment like this? Unfortunately, it is surprisingly simple.
The most common way is by getting scared out of your investments when you turn on the nightly news.
Look at the image below. It shows the rising stock market since the financial crisis, along with all the scary headlines that might have caused you to panic and abandon your investment program.
There was the Brexit vote in 2016, the Deep Horizon oil spill in 2010 and, of course, the 2016 election unnerved many investors.
Any one of these events might have seemed like a harbinger of doom. Any one of these events might have seemed like a good reason to sell your investments and go to the mattresses.
But the problem with that reaction is that more often than not, once the market recovers, it will leave you behind. And the result is likely to be sub-par returns for your investments.
When that happens, you get to experience all the anxiety and fear that come from investing in the stock market without receiving the benefit of good investment returns. This is a terrible combination and you’re probably better off staying out of the markets entirely if you’re not able to stay in when the going gets tough.
It’s by staying in the market during the difficult times that we earn our good returns.
People who let their emotions rule their investment decisions find themselves in a terrible cycle where they are jumping in and out at precisely the worst times. This often results in poor returns at best, and losses rather than gains at worst.
But there is a solution. It’s called substitution and it’s as simple as changing the channel on your radio.
It’s a scientific fact that your brain can only think one thought at a time. It is true that you can think those thoughts very fast and jump quickly from one worry to the next, but one thought at a time is the maximum capacity your brain is capable of.
Use this law to your advantage by substituting a negative thought with a positive one.
What do I mean by this?
Whenever you notice that your mind is obsessing on what could go wrong with the stock market, your investments, or anything else for that matter, simply pause and take a deep breath.
Breathing deeply actually changes your body chemistry. Breathing deeply will change the way you feel.
Now that you’ve broken the pattern of negative thought for the moment, we need to “change the channel”.
We need to substitute a positive thought for the negative ones.
What we can do here is remember what we saw in the Market Cycles Chart earlier. Do you remember what we learned?
While it’s true that the market does go down, it goes up far more often and for much longer periods of time. We need to remember that no matter how bad things feel right now, the market has always recovered and gone on to new highs. It has always done this. Why would this time be any different? All we need to do is leave our investments alone until the storm passes.
Of course, I am assuming that you already have a financial plan in place that will allow you to continue drawing money out of your investments whether the market is up or down.
If you have a plan like this in place, I can’t say you won’t worry. But the fact is you probably won’t need to worry. Of course, if you haven’t gotten around to creating a Retirement Plan and Investment Strategy, maybe you should be worried.
In my experience, worry and anxiety have been great motivators. If you’re feeling anxious and worried because you’re winging your financial future without a plan, use those negative feelings as fuel to stop procrastinating and get your financial house in order.
If you’re looking for help in how to go about creating a Retirement Plan and Investment Strategy, a good place to begin would be by downloading our free guide, 6 Steps to Your Dream Retirement.
But if you have already taken the time to implement a financial plan and investment strategy, Just like changing the channel when a song comes on the radio that you don’t like, we can change the channel in our thinking when we find ourselves overcome with worry and doubt.
And instead of sabotaging your retirement dreams, maybe we can grit our teeth, ride out the storm and then receive all the benefits we deserve by fully participating in the markets.