Last week’s bloodbath in the markets brought back a familiar sense of fear and panic in the market. It is because of times like this that it is paramount that you are comfortable with your holdings. You don’t want to be forced to sell at bad prices due to short term price movements.
So here are some small things I do to maintain my sanity during times of volatility.
1) Invest with money that you know you will not need in the near future
Any potential pressure to sell only makes you more trigger happy. Investing for the long term means you are willing to not touch that money for 5-10 years. Assess whether you will be needing the money for the near future to settle bills, pay for a house, car or any other expense. If the answer is yes, don’t bother dumping it into investments.
2) Never borrow money to buy shares
Let me first qualify the above statement. Leverage is good if you are correct. It allows to you to gain exposure to a larger amount of gains than you would have had with a smaller capital base.
However, as with any good thing, there are downsides.
- Losses are correspondingly amplified if the market moves against you.
- There is a finance cost for leverage.
- If the market goes against you even if in the short term, you might face a margin call that might force you to sell if you didn’t have anything to top up your account. (The concept of margin and margin calls can be read here)
As such, I feel leverage is for traders and not investors.
3) Take out the cost of investment when you are able to
Let’s say you are sitting on a >100% gain. Congratulations on an excellent investment. What I usually do if it’s a company I wish to stay invested in, I’ll sell half of my investment position to take out the cost of investment and let the rest of the position run.
This way, my investment is now free of cost. This gives me peace of mind that I can’t lose money on that investment anymore. The downside of this approach is that if the stock continues it’s run upwards, you will participate less in its rise.
I’ve not had many stocks that I’ve been able to do this on, with only Bank of America being my only example.
4) Do your homework
Researching your stocks is important to fortify your mind against short term volatility. Confidence in your stocks allows you dismiss volatility with no fundamental basis and stick with them through thick and thin. It also allows you to have conviction to buy on dips.
5) Shut down your computer / phone
We still have emotions and feelings though. We still feel crappy when the market goes down. What I do on bad market days usually involves me just turning off my computer and going to sleep. This may sound dumb, but it prevents me from doing anything stupid as I was asleep.
I hope these simple rules and tips can help you to stay balanced during tough markets. If not, maybe watch more comedies to distract yourself?