Hurry Up and Think

One of the more interesting aspects of last week's extreme volatility is the impact that it has on your emotions. There is no doubt that high volatility is uncomfortable for most investors. The large swings result in equally large emotional swings.

A lack of volatility or low volatility results in many investors becoming complacent about their portfolio. In bull markets it is really profitable to buy the dip, buy and hold, just keep buying as these strategies all work. Ingnore valuation. Bears are idiots to be laughed at. In this state we generally focus on the 'here and now' as the portfolio grows. No need to worry about the long term because everything is fine now. 

Inevitably, investors take their eye off the ball. 

All strategies work until they don't. And that is when volatility strikes and things can get scary.

At these times, again it is nearly impossible to focus on any other timeframe than the present. 

It is not helped by the constant changing headlines and speculation from financial media trying to generate clicks with reports that focus on the day's events. 

These emotional panics are natural responses when fear strikes. As we teach in our session on groupthink and personality, our brain automatically respond to volatility with sharp reflex. 

Our timeframes become narrow as the only thing we can think about is the impact on our portfolio. Talk or thoughts of where the market will be 3,6 or 12 month in the future are not contemplated as the emotions override any sense of perspective or logic. 

While extreme volatility is never pleasant you should see it as an opportunity to revisit your investment strategy. It is also a great way to see how much you believe you know when it comes to markets.

One aspect of investing I often see is large bouts of confidence in a bull market followed very swiftly by fear, panic and doubt. When that happens, it is a message that you may not be as confident as you think you are. 

That's why it is important to have a systematic approach whatever your timeframe. That's why asset allocation can be critical. That's why rebalancing on a regular basis instead of changing your approach when market rise works.

Higher volatility always gives way to lower volatility in the future, but in those periods of panic, I almost guarantee you won't be able to think clearly and logically about this until you have been through periods or cycles where extreme volatility is present.

So use these periods to learn about yourself and study your reactions. They will stand you in good stead because there is always going to be periods of extreme volatility.