Stock market volatility is normal. Not reacting to market volatility is hard.
In a world of uncertainty, we are encouraged to focus on what we can control, and to worry little about what we cannot. This is easier said than done with current events, but no less true. We cannot predict what will happen in the geopolitical arena, or how the economy will respond. We cannot control the direction of inflation or consumer sentiment. What we can control is how we act, and how we keep control of our financial responsibilities.
Long-term investing, and a buy and hold strategy, is the easiest task to take on when the markets are climbing. And one of the most difficult as the markets crash. But statistically, staying the course and not trying to time the market is always the best path. Countless studies have shown why timing the market is a bad idea, or changing your investment strategy to take advantage of market volatility is the losing play over the long term.
When the market is crashing it’s hard to keep your cool. Every news article is negative, every prediction sour. And of course, there are stories of those few who are ‘winning’ in this atmosphere of big losses. Maybe this is the time we should try something different. Just this one time we should make a move. Right?
Is this time different? Should investors be making moves? Should the ‘buy and hold’ strategy yield to efforts to time the market? The answer is an unsurprising, no. First, market timing requires too many variables the average investor cannot use to their advantage, and it cannot be done consistently. More importantly, the strategy of market timing requires an understanding of variables most investor can’t interpret. If you don’t ‘market time’ as a career you are not likely to be successful.
The average investor also has a challenging time accepting the math and falls into the trap of thinking this time may be different. As hard as it is to hold on to an investment when you aren’t market timing, it’s even harder to buy back into a losing investment when you are trying to time the market. The average investor who panic sells will miss the recovery and lose out on monumental gains. This makes timing efforts pointless. To market time correctly, you have to be right twice (at the market high and the market low), and you have to be right over and over and over again.
So, if we accept that we are not the next Nostradamus, we must prepare to dig in and wait out the pains of a crash. We must accept the philosophy that says, ‘prepare for the bear market during a bull market and then be prepared to wait it out.’ We know the game plan and we know there is a high likelihood the game plan will work once again. Even if it all feels different.
That doesn’t make it any less scary. That doesn’t mean doubt won’t linger and we won’t think, ‘maybe, just maybe, this time is different. Maybe this time the statistics are lying to us.’ And the longer it lasts, the more the doubt will creep in. But given time, we will again look back at these times with a vague recollection. All current events will become yet another moment in history, and humankind will march on. It’s impossible to know how long it will take to get back to ‘normal’, but it will. This too shall pass.