A Cheat Sheet For Volatile Times

The markets have been quite volatile for the past few months. They bounce up high one day and crash down the next. The geopolitical situation in the Middle East doesn't seem to show signs of improving. Being a financial planner, I have recently been flooded with the same question from my clients : The markets are volatile. Should I make a change or stop my investments. And my answer has essentially remained the same. It is normal for the skies to turn cloudy every now and again.

But every cloud has a silver lining. The silver lining here is that we still call the shots with regard to our portfolios. So as long as we remain in control of ourselves, our portfolios will do the same. I am now going to share a cheat sheet of pointers for volatile times which will stand us in good stead anytime the markets turn volatile.

Clarity On The What And The Why

Dealing with volatile times requires clarity. Both with regard to what we are doing and why we are doing it. This is where having a clear financial plan and investment process comes handy. We may document our investment process in the form of an Investment Policy Statement (IPS). An ideally drafted IPS must contain our core investment beliefs and philosophy. It must lay out a set of clear, actionable steps for us to follow during volatile times. As with our financial plans, our IPS must be specific and personal. Both these documents would then serve as guiding lights during volatile times.

A Calm Mind

The first signs of volatile times see most investors panic like an irreparable crisis has hit them. But every crisis, whether apparent or real, also presents an opportunity. A cool and calm mind would help us spot the opportunity in the midst of the crisis. We must always remember that an emotional mind cannot find a solution to even the most simple problems. But a calm mind can find a solution to even the toughest. Hence, those with a calm mind would profit from the opportunities left for them by those with more chaotic minds.

Clear Perspective

With a calm mind, we will be able to look at the situation with a clear perspective. Perspective kills panic. Let me elaborate. First, stock markets come with the built in caveat of volatility. The current period of volatility is just one among many more to come. Second, volatile times like these only last for a few months or years at a time. A serious investor goes on for decades. A few volatile months or years on a timeline of decades is almost nothing. It is only because we look at things with a microscopic view that volatile times seem painful.

Adopting a telescopic view and zooming out of the situation will make it seem insignificant. We must understand the true impact of the volatile times on our investments. If our process and products are fundamentally sound, we have nothing to worry about. In fact we must use such times to increase our holdings at more favourable valuations. Seeing out such periods without compromising on discipline actually works out to be a game changer for us.

Strong Conviction

Volatile times are the best tests of the strength of our conviction in our investment process. Genuine conviction gives us the gumption to hold on through volatile times and add to our holdings when possible. Our own conviction is always the strongest. That is why it is always important to base our investment decisions on our own investment process. This is of course assuming that our existing process is sound. Borrowing external conviction is dangerous and ineffective.

Block Out Noise

During highly volatile times the advisor inside every investor suddenly wakes up. Needless to say, there is no dirth of opinion available during such times. And they come from all possible sources - financial news channels, financial newspapers, so called stock market experts and analysts, social media, not to mention friends and family.

Opinions from all such sources are meant for reaction, not education. Heeding to such opinions is almost always akin to wearing someone else's shoes. The only ones who end up with a shoe bite would be us. In other words, focusing on such opinions would only create and increase confusion for us.

Our focus should therefore solely be on our investment process and goals. This would help us ignore the noise. It would help us focus on what actually needs to be done.

Use Of Emotional Logic

Emotions are an integral aspect of personal finance. It is easy to say that investors must be completely rational when making money decisions. But human beings are emotional by nature. Therefore emotions cannot be completely removed from the process of investing. They can only be managed. We must therefore learn to use our emotions to our advantage.

In other words, we must be emotional about the consequences of acting impulsively with our investments. We must realise that impulsive decisions may stop us from building enough money for our goals. This would be a lot more painful than a short bout of volatility. Realising this fact would help us reduce impulsive decisions with our money. It would therefore help us make logical use of our emotions.

A Full Life Outside Of Money Management

The cold turkey approach is an extremely effective way to not let markets and volatility affect us. The cold turkey method implies sudden and complete abstinence from something for a period of time. In this context, it would benefit us to stop doing or using anything that reminds us of our money and portfolios. The best way to do this is to ensure that we have enough productive work to do in our lives outside of managing our money. We would be too busy with other stuff to even bother about looking at our portfolios. If it helps we may even consider quitting stock market groups, terminating subscriptions to personal finance apps and so on. Such measures may seem extreme. But under the current circumstances they would be extremely effective.

Final Takeaways

We must remember that we remain in charge of our portfolios and financial plans at all times. Keeping these simple pointers in mind would allow us to navigate these tough times. They would also serve us well every time such situations play out in the future. Following these pointers would allow us to enjoy the better times that undoubtedly await us beyond such periods of volatility.