2 Ways To Handle Volatility In The Stock Market

After a very quiet year on Wall Street, volatility returned with a vengeance last week as the Dow fell over 600 points, triggered by the Coronavirus outbreak originating in mainland China. However, since history shows us that 80% of pullbacks and corrections do not turn into a bear market, here are two ways successful investors handle volatility in the stock market.

Embrace Volatility, Don’t Fear It:

Successful investors know that volatility is part of the process on Wall Street. Instead of fearing volatility, they have learned to plan for it and actually embrace it. One of the major differences between novice investors and seasoned pros is how they navigate volatile markets. The key is to use the power of anticipation. If you study market history, volatility is part of the terrain. So why fear something when you know it is going to happen? In fact, some argue that volatility is actually healthy for the market. I think about volatility the same way I do traffic. If someone drives to work in rush hour traffic, there is no point to be upset and frustrated when you are in traffic. Instead, embrace it and plan for it. Either way, it is going to happen, so I might as well choose to enjoy the process and be happy. Because it is an internal shift that makes a world of a difference to you but does not change the fact that volatility will occur.

I spoke to Chandon M. Simonis, Senior Portfolio Manager and Partner at Parkview Partners Capital Management, a wealth management firm in Columbus, Ohio with $600 million in assets under management he reiterated the importance of long-term investing. “Investing is a process over time,” he said. “Do not get caught up in the short-term volatility and corrections as they are just a moment in time and tend to be historically short-lived versus constructive fundamentally driven positive markets.” Chandon goes on to reinforce, “that one must be careful not to allow market volatility to cause short-term market timing decisions, which are usually emotionally driven, and can lead to adverse returns which may be difficult to recoup in the long-term.”

Look At The Forest, Not The Trees:

The next big point successful investors do is align themselves with the long-term trend. Just about every major piece of research shows that trying to trade on a daily or intra-day basis is a fool's game and yields to sub-par performance. Successful long-term investors know that the market has a powerful upward bias and align themselves accordingly. Trying to trade every day is akin to looking at the leaves on one tree (that day’s action), not the forest.

I also spoke to Michael Landsberg, Director at Homrich Berg, an independent Atlanta-based wealth management firm with over $5.6 billion in client assets and he said, “Embracing volatility can allow discerning investors to potentially pick up extra value through deploying capital when prices are temporarily depressed.” He went on to say, “For long-term investors, volatility should not be feared because the day-to-day fluctuations of the market generally have little effect on a comprehensive financial plan. If fundamentals are strong and a company is well run, the typical daily “noise” from news outlets should not cause steadfast investors to abandon ship.”

Bottom Line:

Volatility is a normal and healthy part of investing. Just about every asset class in the world has some level of volatility. So successful investors have learned to embrace volatility and align themselves with the long-term trend in the market. So now that markets have recovered it is a good time to sit down and plan what you will do the next time volatility picks up. Because it is just a matter of when not if. 

This article was written by Adam Sarhan from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network.