While fixing his car and enjoying the nice weather, my next-door neighbor started enthusiastically finsplaining (explain finance, investing, or crypto to a person who is already knowledgeable about the topic) to me about rates, inflation, the 1970s, real estate, and stock markets. He singlehandedly touched on all topics of economics in one conversation and used all the right buzz words such as stagflation, central bank, and the business cycle. That reminded me of a common saying in investing when the masses start talking about economics and using such lingo, it is typically priced into the market and is likely already reversing. This could be a sign?

Since the beginning of 2022, there has been an uninterrupted sequence of bad news. The current headlines are all about the three Rs: recession, Russia, and rates. Although there are many strategies that can be deployed during down (or bear) markets, given the short-lived nature of such a market, it is generally better to stick to your goals and related asset allocation. We have outlined some ways to weather a market storm:

Maintain your Strategic Asset Allocation, stay focused on your goals

During times of volatility like this, it is important to stick to your asset allocation rather than making emotional decisions. Your asset allocation should be designed keeping in mind your constraints, liquidity, time horizon, and financial goals, with an aim to achieve the desired level of return with the appropriate risk level and factors, one is comfortable with. There is some room for a tactical tilt, and other than that, it is best to revise asset allocation only when there is a change in constraint, belief, or circumstances. The market tends to over-react both ways. When numbers and times are good, every investor is an enthusiastic bull and seeks growth and innovation. When volatility hits, investors turn to panic-selling with seldom any thought to their allocations. Changing your allocation based on market sentiment and/or current performance can hurt more than benefit. Reacting to a down market is an easy way to derail the progress made towards reaching a financial goal.

Take a long-term view, avoid panic selling

Given the constant stream of information through news channels, endless YouTube debates, never-ending podcast suggestions, unlimited market gurus, and so on, it is easy to feel overwhelmed and seek out data that perfectly aligns with your fear-prompt emotions. This is known as confirmation bias, where one can find and frame data to fit or accommodate any idea. There is one truth in the market, however, which is that long-term investors are eventually rewarded. Headlines such as economic recessions, geopolitical tension, terrorist attacks, and reactive monetary policies trigger market volatility that are short-lived. It is important for investors to understand historically volatility and market performance are pieces of a cycle that are tested on a regular basis. While past market performance is no guarantee of how the market would perform in the future, Peter Lynch says, far more money is lost preparing for or anticipating corrections than been lost in the corrections themselves.

Be greedy when others are fearful, buy quality

Spiking negative market sentiment is an uncomfortable time to be in the market for many investors. Often during these times, the market revaluates companies and reassesses valuation imbalances. This is a good thing for investors as markets are typically overly enthusiastic during good times often overpaying. A short-lived downturn can be a good time to invest or add to the positions one was considering or dollar cost average on existing positions. Average market declines are regular events and relatively short-term in nature, and as such it is advantageous to use volatility in your favor. As Warren Buffett once said, it is wise to be fearful when others are greedy, and greedy when others are fearful. 

Market downturns are a natural and healthy part of investing in the stock market. The best returns are enjoyed by being invested all days rather than abandoning or fearfully shrinking investments. It is not about market timing but rather time in the market that is a recipe for investor success.