On Our Minds: How I'm Keeping My Cool During Volatility

I thought 2021 had prepared me well for dealing with uncertainty, what with the emotional rollercoasters of inflation, Omicron and volatile markets. And then 2022 kicked off.

Stocks were hit hard. Major indexes like the NASDAQ, S&P 500 and DOW closed between five and eight per cent lower in the third week of January, their worst week in two years. Against a backdrop of U.S. and Canadian central banks hinting at interest rate hikes, the drawdown was largely concentrated on "expensive" tech stocks that had previously led the market, according to an RBC Global Asset Management MacroMemo published on January 25.

Like many investors, I was reminded of that unsettling feeling when you log in and see a whole lot of red. I caught myself staring at my trading dashboard, cursor hovering over the “submit trade" button, ready to cut my losses. In the heat of the moment, it felt oh-so-easy to do something I hadn't fully thought through.

Thankfully, colleagues and trusted family members were quick to remind me to think about my overall investing goals – and that these market movements, while unpredictable, can and do happen. Once I took a deep breath (or many, if I'm being honest), and started to really think about my goals and plan, I was able to get my market-related anxiety in check. Understanding was key for me. Taking a moment to revisit some of the reasons why emotions can rule the day when markets are volatile can arm us with the wisdom to move forward.

Enter behavioural economics. These classic principles make for essential consideration in recent months. You'll find a longer list in Can You Trick Yourself Into Better Investing Decisions?, but here are three that I've been finding particularly relevant.

Recency bias

People tend to overemphasize events that are fresh in their minds, which increases the chances of acting on the most recent information without looking at the bigger picture. To counter, it can help to look at longer-term trends to remind yourself that market ups and downs are normal.

Loss aversion

This principle suggests that the negative emotions of a loss affect us far more than the positive feelings we get from an equivalent gain. Instead of cutting your losses on what's no longer working for you, you might hang on because of loss aversion. Re-examining one's risk tolerance and considering a regular portfolio check-in can help diminish the impact of skewed perceptions that can result from loss aversion.

Action bias

Behavioural psychologists have found that people have a tendency toward action versus doing nothing. Couple action bias with another factor – like the bandwagon effect, A.K.A. our tendency to follow the crowd – and it's possible to leap before we look. Having a well-researched plan in place can help give us the discipline to make our own informed choices.

So, what now?

When North American stock markets bounced back slightly in the final week of January. (Insert sigh of relief!) Still, as a new-ish investor, the experience taught me that unpredictable ups and downs will continue as long as the markets do, and so will the considerations that come with every move.

I decided to come up with my own checklist to keep handy for the next big market swing that comes along. So far, it looks like this:

1. Keep your eye on the "prize." (In other words, remind myself of my long-term goals. After all, volatility can be expected; the S&P 500 has experienced 19 years of five-per-cent corrections over the last two decades, and nine years of drawbacks of 10 per cent or more.)
2. Volatility can present opportunity. (I need to remember that while market-timing strategies are inherently risky and can tempt us to deviate from carefully laid-out plans, volatility goes both ways.)
3. Breathe! (As I learned recently, even a split-second pause can help benefit our brains. Just enough time for a deep breath!)

What should I add? Leave a comment* to share how you deal with volatile markets.

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