In the past week, we’ve seen volatility return to equity markets. Nothing unusual about that. The reason it felt strange is we’ve had an extended period of low volatility. The index has been in a pretty steady uptrend. Investors have forgotten what it feels like to drop more than 2% in a day. (Short term brains).

But not only is this a normal part of investing, we should expect it. If it’s expected, we can accept it more easily, then learn to take advantage of it.

In his book The Laws of Wealth, behavioural finance expert Dr Daniel Crosby says:

“Repeat after me: Bear markets are a natural part of the economic cycle and I should expect 10 to 12 in my lifetime”

Quick reminder: a downturn of 10% is generally considered a ‘correction’, while a 20% downturn is considered a ‘bear market’. Don’t be surprised – expect it.

Let’s take a look at some typical investor reactions to sudden market falls:

concern, worry, fear, panic – (is this 2008 all over again?)

And the most common trigger?:

it’s the news and the emotive words used to describe what’s going on

Here is a selection of words taken from news headlines over the past week:

bloodbath, clobbered, worst day, shudder, brutal, plunged

Bloodbath – really? There’s no blood! I get that “if it bleeds it leads” but that’s a little extreme. But those words are specifically written for the emotional reaction.

Understand that this is a normal part of markets. And that the news will react in this way. Why not decide to take a calm, measured approach. Take a few deep breaths. Instead of your first question being, “is it time to sell?” instead ask “would it make sense to buy?”.

I’ll be cliched and finish off with the Warren Buffett quote:

”Be fearful when others are greedy and greedy when others are fearful”

Posted by Dave Rae

CERTIFIED FINANCIAL PLANNER

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