3 WAYS TO SURF THE WAVES & NOT DROWN
ARI BAUM CFP®
DOES THE THOUGHT OF A 10% STOCK MARKET DROP MAKE YOUR STOMACH DROP? MAYBE YOU RECALL THE JITTERS AND ANXIETY WHEN THE LAST CRASH CAME THROUGH, AND YOU WATCHED THE VALUE OF YOUR INVESTMENTS FALL—AND FALL—AND KEEP FALLING. UNFORTUNATELY, YOU CAN EXPECT SHARP DROPS IN THE STOCK MARKET AT ANY TIME—TODAY, TOMORROW, NEXT WEEK. IT CAN HAPPEN SUDDENLY, AND WITHOUT WARNING.
Even within recent memory, there was the dotcom boom-and-bust, and the Great Recession of 2008-2009. Those who fared the worst were the ones who sold their stocks as the market kept falling and realized their losses.
Watching the markets ebb and flow is like being a surfer watching the waves. Surfers don’t have the opportunity to do much when the water’s smooth or barely rippling. The fun doesn’t start until the monstrous waves start crashing. To a passerby, the waves look scary and dangerous, but all a surfer sees is opportunity.
Just like surfing, in the stock market opportunity comes with fluctuations in the underlying environment. Surfers know that a big wave can mean a tremendous and awe-inspiring ride, but it can also mean a big wipeout.
In the stock market, there are typically three reactions, as there are to any kind of potential bad news: fight, flight, or freeze. Sometimes doing nothing (or freezing) is the right thing to do. Of course, the trick is knowing which one is best for your personal situation! Unfortunately, it’s all too easy to take the wrong lessons from past recessions and market pullbacks, leaving you unprepared for the next big wave.
Knowing how to take those rides through rough and smooth will help you not only potentially build more wealth, but potentially lose less when the inevitable dips, recessions, and pullbacks occur. Just as waves are crucial for surfing, volatility is a feature of the market, not a bug.
Given that no one knows when the next drawdown could occur, are you confident that you’ll be able to ride it out without losing your money—or your mind?
This sensible strategy guide is designed for people who invest in the stock market and want to make smart decisions about their money, no matter what’s happening in the financial sector. It will help you master the waves of volatility so you can take advantage of the opportunities that come your way when the ride gets rough.
TECHNIQUE #1: RIDE THE ROLLERS
Know when to hang on so you don’t drown.
Sometimes the swells and dips are barely a ripple in the water, and there’s no advantage in trying to surf them. Just hold on and wait them out. Even when the fluctuations get bigger, you don’t necessarily need to change your course and adjust your portfolio. Staying invested and riding out the fluctuations is often the right way to handle volatility in the market.
Your investment losses are only on paper—unless you actually sell the investments. That’s a mistake many investors made in the Great Recession.
As you know, the key to building wealth is to buy low and sell high. When you allow the emotions you’re experiencing to get the better of you, you can end up buying high and selling low. Preventing your emotions from overriding your logical brain is a crucial component to holding on when you need to.
TECHNIQUE #2: RIDE THE ROLLERS
Know how to balance your risk tolerance.
Some investors are naturally aggressive and don’t mind taking on paper losses as long as they do well when the market does well. Others are more concerned with protecting themselves against too much loss when there’s a slump or worse.
Risk is the flip side of the coin from reward. By overprotecting your portfolio from volatility, you won’t have enough purchasing power later on in life. While Americans spent a few years not experiencing much inflation, 2021 brought a sudden uptick in prices—the highest spike in decades.
While cash provides protection against stock volatility, it actually loses ground to inflation: your purchasing power gradually ebbs as consumer prices trend higher. And when interest rates are low, bonds don’t help fight inflation much either.
