The market volatility has caused many investors to yet again panic. Because most investors are overcome by emotion, investor panic to market volatility or corrections is not going to disappear. Very few investors are truly able to separate emotion from investing.
Unfortunately, the remedy of getting through times like this is no different either. It's the same recipe as it always has been. The only differentiation is that each time we have a market environment like this, you have a chance to separate yourself from the pack by behaving differently.
1. Treat Stocks as Businesses
I will be very blunt here. If you can't do this, you probably need to avoid the market. Nothing causes investors more harm than when stocks are viewed as tickers vs. actual companies. Volatility has a devious way of making most investors forget that they are investing in companies vs. simple share prices.
2. Valuation Always Matters
I can't exactly say what is causing the market decline, but I believe it starts with the fact that the market has been on an unyielding advance since 2009. Stock prices were generally above fair value. In addition to this, you mix in a dose of China, the U.S. presidential election, issues in the Middle East, and a Federal Reserve that has finally started raising interest rates, and what you have is a concoction that no one can make sense of. The market hates uncertainty. Make investments where the valuation is reasonable. The market punished LinkedIn (LNKD) by 50% in a single day because of a bad quarter. Even so, shares are still expensive in my view.
3. Treat Liquidity as the Holy Grail
If there is one certainty is that none of us knows when this turmoil will end. Having liquidity creates two invaluable options to an investor. First, you won't ever be forced to sell positions unless it's of your own choosing. Second, you will have the ability to buy when others are selling. Maintain a substantial cash position at all times.
4. This Will End
Perhaps the biggest emotional trap investors fall into when markets are declining is the feeling that the bad times will never end. This rollercoaster will end. When, it is unknown. How low prices will go is also unknown. But the turmoil will end, and understanding that is critical to how you think about your investment decisions today.
If you can think and apply the above, you can then stop watching the ticker tape second by second and minimize the subsequent consequences that result from a minute-by-minute investment philosophy.
