Can you Handle Volatility?
The market has been volatile this year. This is normal. When the market behaves this way, market commentators like to come up with excuses for the volatility. There are plenty of newsworthy events taking place. Russia and Ukraine are at war. Oil prices have spiked above a hundred dollars a barrel. Inflation is rearing its ugly head. I could go on and on. However, if you take a step back and really look at when the market began this current spike in volatility and correction you would see that this began before Russia invaded Ukraine. This began before oil spiked above a hundred dollars. Inflation was already on its way up.
Just about every correction began before the news that many say caused the correction or the spike in volatility. The market is a forward-looking mechanism. The news that comes later is usually not the cause of the correction, but it is the excuse for why it is happening. Markets correct on average every 18 months. Corrections last on average three to four months. By my calculations, this current correction began at the end of December 2021. We are three months in, and we have already seen a tradeable bottom formed. This does not mean the correction is over. It just means that we have gotten some relief from the pain this current selloff has caused. How do you handle the volatility? Does it make you sick to your stomach? Do you lose sleep? If so, you may want to assess your tolerance for risk.
What I have learned in 27 years of managing client money is that most investors want the best returns with the least amount of risk. This sounds great, but in the world of investing it does not work that way. The market will give you positive returns over time. The problem for many investors is handling the volatility that occurs from time to time. Patience and discipline are two key components to achieving great returns over a long period of time. If you cannot handle volatility in your portfolio, do not invest in stocks. Also, if you are losing sleep when the stock market sells off 10 percentage points, you should not be investing in the crypto market. If you cannot handle investing in stocks but think speculating in cryptocurrencies is a better, you need to seriously reassess your risk tolerance, goals, and objectives. I would be much more concerned if Bitcoin lost 30 percent of its value than if the S&P 500 lost 30 percent.
The market is very psychological and can be bipolar. The market can make investors seem bipolar. If you do not like these large moves up or down, you may need to rethink your risk tolerance. Investors tend to make horrible decisions in markets like the one we are in currently. If this sounds like you, please find a good advisor to work with you.