Holy Cow! Holding The Line in a Market Stampede

Last night after dinner, I went for a cycle. When at our holiday home, it’s one of my favourite routes: it goes along behind sand dunes on a wooden boardwalk until reaching the Giant’s Causeway. From there, it’s a push up onto the cliff-top paths. After a few miles, there’s a steep descent with cliffs on one side and a field with cows on the other. I normally dismount and carefully walk my bike down, but I decided to freewheel while on my bike. This was a bad idea.

The cow nearest me bolted, and like a ripple effect, the whole herd panicked. Most alarmingly, they all charged after me, pressing against the fence! On the other side of a very flimsy-looking fence, I was really rattled but eventually passed the field. The problem was I had to go back past this herd to return home. After giving myself 10 minutes to gather my composure and feeling very vulnerable, I gingerly pushed my bike back past without incident, but I’ve been constantly playing the scene over in my mind since. It was very scary.

When thinking about this experience, it brought to mind how the markets can sometimes react in a herd-like way. My “freewheel mistake” was like a major bad news event for the market, causing an initial sell-off until the herd mentality leads to a stampede as fear spreads, just like my charging bovine pursuers.

The feeling of being rattled and the urge to flee is what investors experience during these downturns. The problem of going back past the cows is like the investor’s dilemma after a crash: how do you re-enter when the fear is fresh?

In my terrifying encounter, there was a fence… a very flimsy one, as I imagined in my panic, but a fence nonetheless. In the investing world, that fence is your risk-adjusted, fully diversified portfolio. It’s the protective barrier that guards you from the full market stampede. Some parts of the portfolio may feel flimsy, taking a hit, but others hold strong, preventing the stampede from rolling over you.

How do you get back in past the fear? My solution was to “gingerly push my bike.” Your solution is dollar-cost averaging. Instead of jumping back in, you gradually invest, helping to manage the risk and volatility. Trust your fence – your portfolio and plan – even when it feels flimsy.

I had a very scary experience miles from anyone, late in the evening and in an isolated area, and I have to tell you, coming up with this article isn’t much compensation for it. But if it in any way helps one person hold their nerve during the next market stampede for the door, it will make the experience that little bit easier.