Why You Should Do Nothing When The Market Swings Wildly
Peter Sayles |
We’re talking about doing literally nothing in the markets.
We – humans – have a tendency to make sense of everything. It’s part of our animalistic instinct. To process our surroundings within the context of fight or flight.
So when we see the markets down 2-3% on a given day… our brains are wired to react. It doesn’t help if we turn on the TV and see “Markets suffer worst day since XXX.”
We see these headlines and feel the need to react. We check our portfolios. Confirm we see red across the board. And it triggers our flight response.
What if markets keep falling? What if this is the one? What if…?
We start questioning all of our positions. If it’s time to hold or sell. We rarely think about buying in times like these. We’re just conditioned to protect what we have.
It just feels like we have to do something.
But doing something is often the worst thing to do.
Big swings like these aren’t regular occurrences. 3% moves (in either direction) happen just 3% of the time since 1990. But we feel the need only to take action when the markets go down.
And we also forget that markets move up… mostly all of the time.
The thing we need to do is nothing… The way we do that is by sound investment principles before we buy any stock in the first place.
What is our investment thesis for owning the stock? What happens if we’re wrong? When do we admit we’re wrong? What is the probability we’re wrong? What is our exit strategy?
These are just some of the questions to ask yourself before investing in the stock.
Next, we need to remember that stocks are ownerships in real, operating businesses. Businesses don’t operate on a day-to-day business. And their valuations don’t – and shouldn’t – swing wildly day over day.
Take Hershey’s for example. Is Hershey’s really worth $3 billion more or less tomorrow than it was yesterday? We doubt it. It’s just what someone else is willing to pay for a future dollar of Hershey’s earnings.
But Hershey doesn’t change its chocolate production based on investors selling its shares down X% in one day.
So what do we do when we see these big swings in prices?
We stay calm and follow our stops. Stop losses are very important for us humans. It strips us of making an emotional decision. It forces us to follow math instead.
There’s a constant need to do something because that’s what we’re conditioned to do. But the biggest gains in your portfolio come from years of holding and compounding. Buying and selling day in and day out prevents you from doing that.
When you see big down days… turn the computer off. Go spend time with your friends and family. Enjoy life.
If you get back to your computer and your stops get hit, then you can sell. Otherwise let your winners ride… and enjoy making big money in the markets.