This last Monday, February 5th, the Dow plunged by a near 1,600 points, making it the largest point drop during a trading day in history. When the market gets volatile, meaning it changes rapidly and unpredictably, your initial reaction may be to sell and get out before it gets any worse. As humans, our first instinct is to minimize our losses, which is called loss aversion. In fact, we are actually twice as sensitive to losses as we are to gains according to a 1991 study conducted by Amos Tversky and Daniel Kahneman. It is important during these times of volatility not to let your loss aversion interfere with your investment strategy.
The key to managing this behavior in a financial context is to recognize it. You have to recognize that your emotions will always be there. Even the greatest traders in the world have loss aversion; however, successful traders separate their natural feelings of loss aversion from their actions. Those who are aware of loss aversion can avoid selling at the wrong time as they are not letting their feelings dictate their actions. For example, if you are aware of loss aversion, you would not sell during a 10% drop because you understand that your immediate feeling is much worse than the actual outcome.
During times of volatility, many wonder if it is time to buy more stock. In short, when the market falls, it presents an investor that has extra cash with a buying opportunity. With the proper portfolio, buying more equities to rebalance your portfolio can help to increase your returns. Most pullbacks in a market do not turn into bear markets (about a 20% drop or more). This makes a pullback between 5% – 10% an attractive opportunity to buy more equities. Nobody can time the market, so it is wise to buy during these corrections, where you have these favorable odds that the market will not go lower.
At Fogel Capital, we make the right decisions in times of volatility. We keep investing during times of turmoil and buy when we find low prices for high-quality investments. To be confident in your investments, you must be confident in the behaviors and experience of your portfolio managers. Call (772) 223-9686 to schedule a free portfolio consultation or learn more about our market knowledge.