How to deal with market volatility

Author: Valarmurugan
Published Date: July 6, 2019

How to deal with market volatility

The next short-term movement of the stock market is unpredictable but many investors spend a lot of their time in predicting the market. The problem with prediction is it, we cannot predict the exact future consistently. One of the key main problem with prediction is that, if we predict the future market movement exactly for 2-3 times in row, then it becomes very dangerous because we may feel that, we have got a superior ability to predict the future and the self-confidence increases and it becomes overconfidence, which in turn may ruin our financial journey. Now the question arises, even if we know that short term prediction is difficult then why do most of the investors predict the short-term price movement in the market. The answer lies in an illusion of control.

Illusion of control

Investors tend to feel that; they have got control over short term price movement in the market but in reality, they don’t. This illusion makes us predict the future price movement in stock prices.  For example, every investor wants the shares of the company they have bought to go the only upside, form the day they bought them. This irrational expectation leads to taking irrational decisions. Investors must clearly understand that, if our expectation is rational and realistic then we tend to take a rational decision in the market. Our illusion of control towards markets tends us to take irrational expectation. The key secret to eliminate the illusion of control is to have a rational expectation in the stock market. for example, expecting the company to grow for 40% every year for the next 10-15 years is quite unrealistic expectation but expecting the company to grow at 8-10% for 10 years is a quite a realistic expectation. The key mindset is simple and straight forward, having a realistic expectation of the company you are buying and just because we have bought it, we should not expect it to grow at high rates for a long time. This is an unrealistic expectation.

Investor both in life and in the market feels superior when most of the things are in their control. Tring to control the things which are highly uncontrollable is stupid behavior. An investor must accept the fact that short term price movement is highly unpredictable. The only thing that the investor can control is their behavior towards the market.

Having the right mindset is the key

Equity as an asset class is highly volatile in short period. But financial history has shown that equity assets class have delivered the best in class return over a long period of time. One of the things, why most people get fearful about investing in the stock market, is because of its volatility in the short term. But investors should understand that volatility is the key character of the stock market and expecting the market to be non-volatile is an irrational expectation.  Navigating through market volatility is an art. If we can navigate through day to day volatility, then our financial success is secured. In order to navigate, investors must cultivate the right mindset to deal with volatility in the market.

Having a healthy financial mindset helps an investor to have peace of mind during volatile times in the market. investors 

The market is always volatile in short term

Weather in the stock market is not always in the right condition. Financial weather in the stock market changes on a day to day basis. Investors seek perfect climate in the stock market for their entry. But that’s not at all possible because we cannot predict the exact future financial weather. If investors keep on looking for predicting the climate to enter the market, then one would never ever make the entry. Investors job is not to predict the next season in the market but rather prepare for any type season that may come in the future. Investors should be able to tackle and prepare for any financial climatic shock in the stock market which also means that, the risk they take during different climate should be different. For example, during a euphoric time in the stock market, when all the stock has gone up significantly without any improvement in fundamentals of the company then, investors should be able to sell their shares and during depressed climate in the market, investors must go all in, to buy the shares.

Investors don’t realize the fact that depressed times create opportunities for buying but it is mentally difficult to implement it and that is the precise reason we must develop a right mental habit to tackle any kind of weather in the stock market.

Most of the investors tend to think that, Warren Buffett is a great investor because of his vast knowledge about business and a huge amount of experience in the market but that’s not correct

Buffett is a master of his own emotions. Buffet’s superpower lies in his ability to buy stocks when everyone is selling and sell when everyone are buying. This seems simple at first sight but a normal human mind won’t buy when everyone is selling and won’t sell when everyone is buying and that’s the precise reason why he is one of the best investors in the world.

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