See some psychological tricks Jim uses to avoid panicked decisions and stay the course.
Markets and economy

How I learned to stop worrying and love market volatility

8 minute read
April 17, 2019
Markets and economy
Market volatility


It’s scary when the stock market is volatile. It’s even scarier when you consider how much of your future you have invested in it! For the last year, it’s felt like the financial and economic world has been on the verge of something very bad. There’s fear of a recession on the horizon. Volatility remains. Through it all, I didn’t change what I did. I followed my plan. I’m not a stoic. I’m not a machine. But I’ve learned how to ignore what my lizard brain is screaming at me to do. Today, I’ll share some of my strategies with you. Here are the psychological tricks I use to avoid panicked decisions and stay the course:

Track your net worth

When you track your net worth, it puts volatility in perspective. I’ve been tracking my net worth since 2003. Every month, I put all my financial numbers into a spreadsheet with the help of financial dashboarding tools. Stock investments make up one of the biggest components of my net worth. I had investments in the stock market during the housing bubble and the 2008 global financial crisis. It was a scary time. I was contributing to a 401(k) and making investments in a taxable brokerage account, so the news stories were more than just stories. They were reflected in my account statements. But with my records, I can look back on history and maintain a long-term view. I look at my spreadsheet whenever I sense panic. It reminds me that I have a plan and I should stick to it. When I think back to volatility at the end of 2018, I didn’t panic because I made the majority of my investments before then. That’s a function of investing for many years—my most recent investments make up only a small percentage of the total. I’ve been investing for 15 years, and I’ve built up a moat of unrealized gains. That moat helps me sleep at night.

Put your money in “time capsules”

I think of my investments as being in time capsules. When I contribute to an IRA, I don’t expect to touch that money until I near retirement. It’s figuratively locked in a glass case I can’t open. (Plus, I’d likely owe taxes and fees if I were to use that money early.) I can adjust those investments, but I won’t be withdrawing any money for decades. Knowing I won’t be spending that money means I can invest it confidently in the stock market and take advantage of its volatility. A drop in value in the near term can be scary if you need the money. It’s less scary if you tell yourself it has decades to recover. And remember, in the stock market, a lot can happen in 5–10 years. During the 2008 global financial crisis, the stock market fell by 50% and then regained all of its losses within 5 years! The S&P 500 Index was near 1,500 at its peak in the fall of 2007. During the crisis, it bottomed out at around 675 in March of 2009. It returned to 1,500 by early 2013.

In case of emergency

If your investments are in time capsules with figurative locks, you need to set up a system that doesn’t tempt you to access them. For that, I rely on a healthy emergency fund separate from my investments—cash I set aside to help me weather a financial downturn. The amount of cash is based on individual needs, not what the market is doing. If market volatility increases and I get worried, I consider this money my insurance policy. With this emergency pool of funds, I won’t feel compelled to sell other shares. I can wait out the downturn. I have a safety net.

Keep a long memory

I started investing in 1998. I was studying computer science at Carnegie Mellon University, and I felt like I understood the internet! Then I did what most college kids who think they know everything do—I started making decisions based on this irrational confidence. And I paid a high price to learn about the Dunning-Kruger effect! During the dot-com bubble and subsequent burst, I lost a big chunk of my Roth IRA trying to catch falling knives, many of which no longer exist (JDS Uniphase ring a bell for anyone?).

Stop consuming financial news

If you’re constantly consuming financial news, it’s hard to disconnect and avoid panicking when things are going badly. When you see red numbers everywhere and pundits warning we might be entering the next recession, you may be tempted to take action. You want to do something because of your sympathetic nervous system’s well-trained fight-or-flight instinct, which kept our ancestors alive. When you’re in the jungle and you hear bushes move unexpectedly, your brain tells you to do something or you might get eaten. The financial news is the rustling of the bushes, the phantom of the ferocious beast about to pounce. Except in this new world, it isn’t. The bushes rustle no matter what.

Talk it out

Sometimes you just need to talk to someone to calm your nerves. I find the simple act of putting words to feelings is often enough to help me realize I may be panicking. Speaking to someone else forces me to work through my logic. I want to be able to justify my decisions. There’s value in speaking with someone, even if it’s only a sanity check. I hope you find value in my strategies to keep calm during volatile times and that you can integrate some into your investing approach.

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Jim Wang’s opinions are not necessarily those of Vanguard. Mr. Wang is a professional finance author and blogger, is not a registered advisor, and has been compensated for producing this blog.