No matter which investment methodology you use, you are bound to be frustrated and disgusted from time to time. Recent market behavior seems to have brought these feelings to the front burner, as reader Chris writes:
I value your input and am grateful for the service you provide.
How do you deal with the volatility of the market such that when you sell funds that have reached their sell stop one day, and the next day the market goes up a lot (like today) and erases the losses you took for the day before?
All of my funds are in either 401K’s or IRA’s and I still have 20+ years before I have to start taking disbursements. However, I get so upset when the market falls so much (I lost 50% during the bear market of 2000).
How do you distance yourself from what you do and not take it personally?
I am sure that Chris is not alone with this assessment, so here’s how I answered her:
“I have found that the only way to deal with the irrationalities of the market place is to detach myself emotionally by using a systematic approach to investing such as I advocate.
As you know, we have a clearly defined entry and exit strategy; still, you have to accept the fact that sometimes markets will go against you, by stopping you out of your positions and thereby either triggering a small loss or forcing you to take profits.
There is no perfect investment approach. While there are many, every one of them has its drawbacks at one point or another. Since you still have some 20 years to retirement, you need to look at the big picture. While there are never any guarantees about investing, one thing is for sure: There will be another bear market, which has the potential to shave the value of your portfolio down considerably.
Unfortunately, many experienced that disaster during the 2000 to 20003 period, as you did, by seeing their portfolios deteriorate some 50% or worse. That’s what you need to guard against, everything else is secondary.
Having said that, the day-to-day pull backs and rallies (and occasional whipsaws) that have frustrated you, are merely an inconvenience, a price you pay for being astute and aware of the fact that bear markets need to be avoided at all costs.
I don’t like the day-to-day changes any more than you do, but I keep my nose away from hyped up news stories and focus on the big picture as outlined. That helps me keep my emotions in check.”
Comments 1
Wise advice, Ulli.
This comment should be read and reread and then read again:
“I have found that the only way to deal with the irrationalities of the market place is to detach myself emotionally by using a systematic approach to investing such as I advocate.”
Without that detachment the market will eat you alive. Because it’s extremely difficult to react to and deal with the vagaries of the market on a day-to-day basis, you eventually tend to lose focus and let your heart rule your head. Dangerous territory, indeed.