Beginner’s Guide to Market Volatility

4 smart ways to cope with market ups and downs, according to a psychologist

"Investors need to find a way to feel good when the market is going up but not feel overly bad when it is going down."

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Ignoring the news and continuing with your financial plan when the stock market has a bad day is often easier said than done.

"Not every personality type is as capable of doing this," says psychologist Frank Murtha, coauthor of "MarketPsych: How to Manage Fear and Build Your Investor Identity."

"Investing in the stock market is like a tractor beam, constantly drawing you into a short-term perspective of your money,” he says. “We can't help it. And it gives emotions much more sway in our decision making."

Thinking about your potential to have an emotional reaction to market moves can help you head off impulsive decisions that don't benefit your long-term goals. Here’s how to prepare.

1. Find 'emotional equilibrium'

Ignoring your emotions might sound like sensible advice, but it's not realistic for most people — and it may not be healthy, either, Murtha says.

He advocates optimizing your portfolio both for your financial goals and for your feelings about risk.

"Investors need to find a way to feel good when the market is going up, but not feel overly bad when it is going down,” says Murtha, who also holds a Ph.D. in counseling psychology. "I call it emotional equilibrium, being in a state of balance regardless of performance."

2. Remind your future self to 'stay the course'

Try making a firm plan during normal times for how you’ll handle a downturn, suggests Jamie Foehl, senior behavioral researcher at Duke University's Center for Advanced Hindsight. Put that plan in the form of a letter you write to yourself, so you have guidance to follow when things turn emotional.

"Do things in advance to prevent yourself from making bad decisions," she says. “The letter tells you, 'Hold the phone. Stay the course.'"

3. Build up your emergency fund

It helps to have some cash on the sidelines, too, says Murtha. Having an emergency fund can be reassuring when stocks fall, and it also provides flexibility to turn falling prices into opportunities.

"The ability to take action, to take advantage of market drops rather than just assuring yourself that things will get better, increases your sense of control — which is a major lever in managing anxiety," he says.

4. Brainstorm healthy coping strategies

After a market rough patch, it’s important to work through your feelings so they don't lead to more damaging financial decisions.

For example, an investor who has been burned might decide to sit on the sidelines rather than stay in the market, derailing progress toward their financial goals. Or they could make very risky bets, trying to recoup that lost cash.

“You have to talk about it. Make sense of it. Put it in perspective and learn from it,” Murtha says. “I always recommend involving a financial professional or at least an investing confidante who can provide a perspective."

The ability to take action, to take advantage of market drops rather than just assuring yourself that things will get better, increases your sense of control.
Frank Murtha
coauthor of "MarketPsych: How to Manage Fear and Build Your Investor Identity"

Jeff Kreisler, editor-in-chief of behavioral science forum PeopleScience.com, says keeping perspective might be the most important coping mechanism. After all, if you’re investing over decades, market bumps aren’t a big deal.

"Look at long-term trends," he says. "Don't look at what's happened in the last day or week or month. Look at the past year."

He adds: "A long-term perspective is the key to get you through the ups and downs."

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