MANY INVESTORS endured their first stock market crash this year. But what if you’ve never before invested in stocks? How do you know what your risk tolerance is—and how do you keep yourself calm?
There are no easy answers. Questionnaires aren’t a great way to find out our risk tolerance. They ask us about hypotheticals when we’re calm, but we act and think differently when the storm hits. Instead, the only sure way to find out our risk tolerance is to weather a storm or two.
As a relatively new investor, I had no idea how I’d react to 2020’s bear market. March gave me my first real test. At the beginning, I struggled not to panic when some of my investments were down more than 50%. As the turmoil continued, however, I did my best to make the most of a painful time, including coming up with strategies to handle my emotions. Here are six of those strategies:
1. Reframe the situation. Market downturns will keep happening. It’s up to us to view them not as losses, but opportunities. Say we bought stocks in January, before the selloff. Why shouldn’t we buy more when shares plunge 30%?
Yes, the market could indeed fall further, but nobody has a crystal ball. We know, however, that stocks are cheaper today than a few months ago—and that they should generate higher returns if we buy at lower valuations. If we were buying when stocks were higher, we should be even more enthused now that prices are lower. If anything, we should increase the amount we invest each month.
2. Consider your time horizon. If we’re investing in the stock market, we most likely don’t need that money for the foreseeable future—maybe not even for decades. Bear markets are temporary. Most of the time, investing in the stock market is the smart long-term choice, especially if we buy at times of crisis. If we’re young, we should be grateful for the chance to buy at today’s lower prices—and that we have many years ahead of us for our stock market investments to appreciate.
3. Focus on the amount you invest. Early in life, the savings we put away matter much more than the investment returns we get, while the reverse is true as we grow older. For instance, if we have $10,000 invested today, losing 30% shrinks our portfolio by $3,000—a hit that we might be able offset with a few months of savings. Fast forward three decades and imagine we have $1 million invested. A 30% drop would knock $300,000 off our portfolio’s value—a loss we couldn’t possibly make up simply by saving more in the months ahead.
4. Remember that your net worth is more than just your stocks. We may have a house, bonds, bank deposits and other assets, as well as our income-earning ability. A 30% decrease in the stock market doesn’t mean our total wealth falls 30%—it’s far less than that.
5. Curate your news consumption. Not all financial content is created equal. We’d do well to dedicate time to reading, watching and listening to advice that calms us and helps us control our emotions, rather than to news that fixates on plunging stocks and forecasts about the end of the world.
As share prices tumbled, I consumed a lot of information that helped me navigate the situation and stay calm. But you might opt to disconnect from the financial news entirely. For extra points, forbid yourself from monitoring your investments on a daily basis.
6. Have a plan. All of the above is easier said than done. Pondering these things before we experience a market crash isn’t the same as living through one, but it helps to prepare us. When the next crisis hits, we may not stick to our carefully drawn up action plan—but we certainly can’t stick to our plan if we don’t have one in the first place.
Marc Bisbal Arias holds a bachelor’s degree in business and economics, and is a Level I candidate to become a Chartered Financial Analyst charterholder. He started his professional career at Morningstar, performing research and editorial tasks, and is currently employed by Dow Jones in Barcelona, Spain. Marc’s previous article was Setting Boundaries. Follow him on Twitter @BAMarc.