How to overcome investment anxiety in difficult markets
"Follow your compass, not the current"
Everyone knows the basic strategy of “buy-low/sell-high”, but when it comes to practicing this, many investors seem to abandon the ship of volatility and opt for lifeboats in the form of cash and income investments. No sane businessperson could find success by buying overpriced goods and then selling them below cost, and yet investor behaviour has proven to do this very thing when troublesome winds begin to blow.
At this point it is important to mention the role that emotion and sentimentality play in our investment decisions. Our emotions can have us clinging onto rocks that drag us down simply because of the resources that we have already invested into them (see Sunk Cost Fallacy). Emotions can also scare us into making panicked decisions that have no solid rationale behind them. This article seeks to explore how investors can manage that anxiety response, and identify what opportunity really looks like.
Unfortunately, opportunity doesn’t sparkle, and is often dressed in rags rather than silk. In fact, the bottom of the market is the point of highest pessimism. This means that the road to successful investing has to be one you journey alone - that can be scary! It seems counter-intuitive, but a decline in market prices should trigger us to want to buy more rather than sell. In fact, investors who have monthly contributions should be quite content with the last few years (of poor returns) as they have been stockpiling assets every month at price increases that have barely beaten inflation.
So how do we keep leaning into the pain without hurting so much? This comes back to the fundamental understanding of how different asset classes behave, and how that ties into one’s financial goals. We know that in order to open the door to potentially higher relative returns we have to also let in his pesky little friend, risk. We also know that time is a great mitigator of risk (or volatility). So in the pursuit of long-term growth, one should allocate assets accordingly (with diversity within these assets), but then not agonize over the fluctuations that are inevitable (and in fact part of the reason these assets are more attractive for the long-term). At the onset of portfolio building we need to be cognizant that growth assets come with short-term uncertainty, that way when doubt and loss arise, we can rest assured that given enough time the shadows will be replaced with sunshine. However, making drastic changes out of fear only work to lock-in losses, blowing the final whistle of the game with you still behind on the scoreboard. An investment portfolio should be regularly reviewed, but acted on rarely. Your allocation should be aligned to your goals, and shouldn’t be altered due to past performance alone. After all, we invest for the future.
When an investment plan is solid and congruent with our targets but requires change, we should first focus on what we have control over, rather than that which we cannot affect. Note whether your goal is still realistically achievable within its given time frame and given the risk you are willing to take on. If not, then consider adjusting the time frame or value of the goal to better suit. Alternatively, one may need to look at inputting more capital to reduce the required risk/return.
Always return to the ambition of your investment (“to make a lot of money” is not a true investment objective) and build your portfolio for this possible future, but also be prepared for disaster along the way. No ship has ever planned to sink, but they always bring along lifeboats.
Victor Bucarizza CFP®
Victor is a certified financial advisor at GIB Financial Services
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