Dealing With Stock Market Turmoil
Dear investor,
As mentioned by Warren Buffet, “The stock market is a device for transferring money from the impatient to the patient.”
For most investors, 2022 is being a rough year so far. With most indexes down from their all-time highs, investors continue to worry about further declines in the market.
In the U.S, the S&P 500 is down 6% YTD whereas the Nasdaq Composite is down more than 12% YTD. As you probably already know, tech stocks are getting hit hardest. High valuations, coupled with rising interest rates, have landed a one-two punch on technology stocks to start the year.
In Europe and Asia, the situation is similar, the Euro Stoxx 600 is down more than 6% YTD whereas in Asia the Nikkei 225 is down 6.6% YTD, the Shangai Stock is down 11% YTD and the Hang Seng Index is also down 6.6% YTD. The only index that seems to be saving is the FTSE 100 with a positive YTD return of +0.71% so far.
Inflation, the Russia-Ukraine conflict, central banks tapering, higher interests rates, and COVID-19, are some of the concerns investors are facing right now.
Seeing the way stock markets are reacting these days, it does seem that the world has indeed gone mad.
Now the question is – how do you live with so much uncertainty and volatility out there and still keep your otherwise level-headed thinking intact?
The answer lies in how you manage your emotions while investing (and staying invested) in stock markets.
It’s not IQ, but EQ that counts more in investing
Yes, successful investing is all about having the right amount of EQ, or ‘emotional quotient (the measure of a person’s emotional intelligence).
This is what Daniel Goleman, the author of Emotional Intelligence has been promoting since the 1990s – that success is more closely tied to emotional intelligence than education or knowledge.
As he wrote in his book…
“As we all know from experience, when it comes to shaping our decisions and our actions, feeling counts every bit as much – and often more – than thought… Passions overwhelm reason time and again.”
Goleman argues that two key aspects of emotional intelligence are:
Impulse control, and
Persistence
These are exactly the two qualities that will keep you from abandoning your investment strategy in a panic.
As far as the current uncertainty and volatility in the stock markets prevail, investors need to control their fear. It means that you have to hold your head when others around you are losing theirs, you need to use your EQ, not your IQ.
How to be emotionally intelligent?
Here are four ways you can use your emotional intelligence while investing in stock markets:
1. Have realistic expectations
The stock market is one place where trees are expected to grow to the sky. However, you must resist the temptation (especially during a bull market) to think this way. Similarly, during panicky times like what we’re seeing now, avoid expecting the world to end and the markets to close down. Things always get normal. It only takes time.
As Abraham Lincoln liked to say, “This too shall pass”. When things are bad remember: it won’t always be this way. Take one day at a time. In the same way, when things are good remember: it won’t always be this way. Enjoy every great moment.
2. Resist the urge to “do something”
It’s one thing to feel fearful about the market. It’s quite another to let that fear crush your well-laid investment plans. Resist the temptation to “do something”. Resist the urge to push the panic button. Your impatience can turn out to be a bigger disaster for your portfolio than any stock market crisis.
3. Automate your investments
If you’re just starting out on your investment journey and have many years left for accumulating wealth, use a discipline like dollar-cost averaging – investing a consistent amount at regular intervals – to take advantage of the market’s occasional volatility. A systematic investment plan (SIP) in a good mutual fund can help you do that.
4. Ignore the big noise of the market
Here you have a few tips that have been very useful to me. Try to limit the amount of time you read or watch the financial news. The more noise you receive the higher the probability to make a mistake. I will check the markets first thing in the morning and then I will try to forget about it. If you own a portfolio of businesses, avoid checking the stock prices every day, especially during the red days. Instead, you can check the indexes variations to which they belong.
For instance, if most of your holdings are large U.S companies, you can check the S&P 500 to get a general idea of how your portfolio is doing. Also, if you own tech businesses, a good idea might be to check the performance of the Nasdaq Composite instead of tracking the stock price variations of your companies.
Remember, you have to think like a business owner. If you have a portfolio of high-quality businesses, what the stock price does today is irrelevant over the long term. As long as the business keeps performing well you will be fine. Focus on business performance and the stock price will eventually follow.
We are humans and thus can’t protect ourselves against occasional bouts of emotional outpourings. But it’s safe to say that if you let those emotions control your investment decisions, eventually you’ll be left with nothing but regret.
So, use your emotional intelligence while investing in the stock markets.
Don’t panic. During moments of turmoil and negative volatility try to focus on what really matters. Enjoy life, spend more time with those that you love, exercise, eat well, and make some fun activities. Better times in the stock market will eventually come. Living a happy life is easy, don’t overcomplicate it.
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Thank you for your support, and all the best in your journey to become a successful investor.
Yours truly,
The Buddhist Investor