Spooked by Market Declines? Don't Panic—S.T.O.P.
2022 is off to a rough start for investors. Already reeling from the prospect of higher interest rates, ongoing supply chain issues from the pandemic, inflation, and increased geopolitical uncertainty, our emotions are running hot, and our sense of security has been rattled—not to mention the fact that financial markets have been volatile.
It's understandable for investors to panic when markets suffer a sharp decline. After all, that's our hard-earned savings and investments we see disappearing. It's the financial security we're counting on to make important purchases, live our lives comfortably and care for our loved ones.
Unfortunately, though, that sense of panic that comes so naturally is not our friend. In fact, it can cause us to behave in a way that is in direct conflict with our best interests. You know the old saying "buy low, sell high." Well, panic can easily make us do just the opposite.
So, what's an investor to do instead? As someone who has benefited greatly from the practice of daily meditation, I'd like to share a simple but effective four-step technique that can translate to the world of investing. Known by the acronym S.T.O.P., it can help us remain clear-headed and focused in the face of challenges, whether those challenges are personal, professional, or yes—even financial.
Stop: This first step probably sounds easy, but it may be the hardest. Give yourself a moment not just to slow down, but to come to a full stop. No cable news, no social media, no checking your portfolio. Studies have shown that investors who constantly tinker with their portfolios do more harm than good. So, instead of logging onto your accounts, take a walk, sit quietly, listen to music, or practice meditation—anything that will give you a break.
Take a deep breath: Once you've come to a stop, help your body relax further by breathing deeply. Literally. Breathe in, breath out. It's a lot like the 'tactical breathing' that Navy SEALS are trained to use. When you're stressed, you're more likely to say or do something you'll later regret (we've all been there). So do your portfolio a favor by relaxing and clearing your mind before you make a rash decision.
Observe (but don't act): Once you're relaxed, you're in a great place to open up your mind and gain perspective. First, remind yourself of some basic facts. As uncomfortable as they may be, market declines are inevitable. But the pain is temporary and markets tend to reward investors who can tolerate this temporary discomfort. With this perspective, take a few minutes to reflect on your goals and time horizon as well as your willingness to take on risk. What are you saving for? If its retirement that's decades away, remind yourself that you have many years to ride out the current downturn. But if you're saving for something in the next few years, perhaps you've taken on too much risk and you should consider rebalancing. There are no universally right or wrong answers. The important point is to take the time you need to calmly evaluate your situation.
Proceed: Once you've gained a deeper understanding of current conditions and have reasonable projections for the future, you can consider making a change—or not. When markets are in decline, often the hardest—but smartest—approach is to do nothing. But once you've taken the time to S.T.O.P., you're in a much better position to act with clarity and purpose. With this knowledge front and center, accept that you can't succeed by trying to time the markets. Instead, use your energy to focus on the things you can control: your asset allocation, diversification, and savings rate.
Once you have a well-constructed financial plan with a balanced portfolio in place, investing is less an epic battle between you and the markets, and more a tug-of-war between your emotions and your actions. Warren Buffet puts it this way: "All that's required is the passage of time, an inner calm, ample diversification, patience, and a minimization of transactions and fees."
Yes, that's a tall order. But whether it's S.T.O.P. or another technique that works better for you, when the markets decline, do your best to focus on your goals and stay the course. Try to view periodic losses and uncertainty as nothing more than distractions. Investing rewards those who have a disciplined process and requires patience during times of volatility and uncertainty.
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