Staying Calm in Volatile Markets

Unless you’ve been living under a rock the last couple of months, you’ve probably noticed that the stock market is down for the year.  At the time of writing, the S&P 500 was off 2.66% and the Dow was down 3.29%.

This can make any investor nervous, especially if your the kind of investor (like me) that funds your lifestyle from investments.

So how do investors get comfortable with negative returns and stay calm during volatile markets?


Yes, Markets Fluctuate

Let’s do a little reality check here:  It’s been 9 years since U.S. markets last saw a negative year.  Yes, 9 years!  We last saw a negative return year for the S&P 500 waaay back in 2008.

These long periods of positive returns are actually unusual market behavior, and far from “normal”.  In fact, the last time U.S. markets saw a boom of this magnitude was in the 1990’s (1991-1999).  This was the largely the dot-Com boom which brought about the internet and e-commerce for the masses.  It changed the world.

That boom was subsequently followed by three years of negative returns.

Yep, negative years  do happen.

If you ever plan on living off your investments (now or later), you need to get comfortable with this fact.  Negative years (sometimes multiple negative years in a row) are a normal part of market behavior.


Look At The Forest, Not The Trees

But being comfortable with “losing money” isn’t easy.  Even experience investors can get “itchy fingers” when they see the market falling day-after-day.

So here’s the first thing to remember:  Today’s current market price has very little to do with your long term returns.

For most stocks, only a tiny fraction (usually significantly less than 1%) of a company’s stock trades on any given day.  Why should such a small subset of shares trading hands worry you?

forest or trees
Are you looking at the forest or the trees? The market has the tendency to make us look a little too closely at the trees.

It’s just like if someone sold a house at an unusually low price in your city.  That sale price has very little to do with what YOUR house is worth.

You wouldn’t decided to sell your house because another home-owner got themselves into financial trouble, would you?

The long-term picture is far more important!


Dividends Dividends, Dividends!

I’ve been pounding this drum for years now, but instead of watching market prices, investors should be focused on real business returns, not the crazy manic behavior of Mr. Market.

For most investors, real business returns appear as dividends.  That’s right — good old fashion dividends.  A check that comes out of the company’s bank account every quarter and gets deposited in yours.

THAT is a real return!   If you make good investments, these dividends continue to grow year-after-year because of compounding.  It can happen during recessions and booms too!

According to research done by professor Jeremy Siegel in his book “The Future For Investors“,  dividends have historically made up about 50% of stock returns in US markets.  That’s pretty HUGE when you think about it.

keep calm and dividend on
Dividends of good companies are still paid and even increased during times of market volatility.

So don’t worry if the market becomes volatile or negative for the year — Just check on your dividends and dividend growth rates!  Those are two numbers are an easy metric to track!

Everything good?  Keep calm and dividend on!


Read The Annual Report

But what if your investment doesn’t pay dividends?  Some companies choose to reinvest all profits back into the business… and that’s totally OK.  This can often lead to very fast-growing companies, but very volatile stock prices.

Fast growers like Tesla and Netflix can experience huge swings (plus or minus 20%) in any given week.

So how do investors stay calm when they don’t have the safety of a steady dividend assuring them a stable business exists behind those shares?

Cover your eyes and start praying….

No wait, wait, that’s not right!  Stop looking at the market price, and start tracking your investment performance using non-market based metrics.  You’ll have to crack open an annual report (or quarterly report) to do this.

Companies publish financial reports regularly, and reviewing the financial state of your investment goes a long way toward calming investor fears.

Some companies that don’t pay dividends use change in book value per share to show non-market based returns to investors.  Berkshire Hathaway (for example) has been doing this for decades.  It’s usually on the first page of his annual Letter To Shareholders.

This is a fairly good way to go about it (but not perfect).  As long as that book value keeps marching forward at a steady clip, investors can be assured that market prices will rise again.

berkshire book value
Berkshire Hathaway book value per share has quietly marched forward year-after-year. Meanwhile the stock price saw considerably more volatility.

Other businesses toute unusual metrics like “number of subscribers”, or “gallons of product produced” — but equating these back to reasonable stock prices can be quite tricky.  Choose your metrics carefully.

Using non-market based metrics is an important part of keeping your cool during down markets, but this works best when you hold individual companies.  When you invest in hundreds of companies via a index, this becomes is rather unrealistic.

Do Something Else

The thing is — markets are always changing their mind.  One day a news article will come out that will have investors freaked out and selling shares.  The following day will have another news article telling investors “it’s all OK!”

Really, who knows what the future holds?  One day might be a giant negative trading day, and the next day might be a super positive trading day based on no news at all!  Sometimes the changes are tiny, and sometimes they’re big violent swings!

You can’t make yourself sick over what Mr. Market is doing!  Just get your mind off the market!

This is why I strongly recommend the following action next time Mr. Market is in a fowl mood — take a deep breath and go do something else!

Kid Friendly VNP
Is Mr. Market being grouchy? Head outside and take a hike instead!

Ignore the news about trade wars, NAFTA re-negotiations, or pending recessions.  Go for a walk and get some exercise instead!  Or, work on a personal project.  Volunteer in your community.  Find something (anything) to do that isn’t staring at red numbers and worrying over what might happen.

Business is not going to dry up tomorrow — There will be more people in the world tomorrow, and those people will need food, shelter, clothing, healthcare, entertainment, and a vast number of different services to make life easier!  As long as people have needs that must be filled, businesses will work to fill those needs… and ultimately profit from them.


Final Thoughts.

I have absolutely no idea if the next 5 years are going to be negative years or positive years, but I’m confident that my investments will be worth more in 20 years than they are today.

Why am I so confident?

Real long-term returns are all about compounding.  As long as I can watch that compounding at work, year-after-year, I know the true intrinsic value of my investments will continue to rise.

Here’s one of my favorite quotes from Buffett that makes this point perfectly:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

It’s in the compounding where the weight of an investment hides.  So wrap your tentacles around compounding in all its wonderful forms.


[Image Credit: Flickr1, Flickr2]

23 thoughts on “Staying Calm in Volatile Markets

  • March 31, 2018 at 10:36 AM

    Great points and you’re right, Markets do fluctuate. Stock market investing is like a long term marriage. You will have a few ups and downs but if you and your spouse are DETERMINED to make it a success; you’ll experience a rising upward slope despite the few minor setbacks along the way.
    As a side note, I hope quite a bit of cash on the sidelines; as a buffer against volatility, to provide liquidity and to have dry powder to exploit the opportunities to add to positions during sell offs.

    • April 1, 2018 at 3:18 PM

      That’s true. I have quite a bit of cash on the sidelines right now, but not entirely by choice.

  • March 31, 2018 at 10:49 AM

    “Why am I so confident?”

    Because you believe in America!!! And I do too… I’ve been through the dot-com bust, the ’08 recession. This ain’t nothin’! And if it last’s three years then so be it, been through that too.

    “Go for a walk and get some exercise instead!” – Great advice, that’s what I’m going to do today!

    • March 31, 2018 at 9:24 PM

      I’ve been through those two as well. Now, I feel largely immune to the short term volatility. The recent 10% drop didn’t cause any sleepless nights for me. I think we’d have to see 30% before I start to worry. Experience really helps when the market is volatile. That’s why I think everyone should start investing when they’re young.

      • April 1, 2018 at 12:12 PM

        Time and experience definitely help!

        Investing isn’t a game that requires good health or youthful vigor. It does however require patience, wisdom and time. The young have time, but not wisdom and patience. Old folks might have learned patience and wisdom, but have little time left…

        We’re at the luck point in our lives where we still have time left, and perhaps have learned a little wisdom. 🙂

  • March 31, 2018 at 12:37 PM

    I love the Buffet quote!

    I try not to get too nervous when markets are falling fast, but it’s never easy.

    I try to remember that annual rebalancing of my index funds forces me to buy low and sell high even which is virtuous. I also remember that rebalancing during the Financial Crisis (buying really low) is what allowed me to FIRE sooner!
    Mr. Freaky Frugal recently posted…Right investing effort

    • April 1, 2018 at 12:05 PM

      Thanks Mr. FF! I too made good decisions during the Financial Crisis and it made a huge difference!

      That Buffett quote is one of my favorites — So much wisdom contained in so few words!

  • March 31, 2018 at 8:06 PM

    Great reminder, Mr. Tako! I just checked my 403(b) interest rate the other day, and it was less than 1%. It was 12% in Nov or Dec last year.

    I don’t have a ton of money invested in my retirement account, so I’m not overly worried. In fact, I choose not to check it often. But I can see how it could be stressful to a lot of people who have hundreds of thousands or millions invested in stocks.

    • April 1, 2018 at 12:01 PM

      Well, I wrote the post mainly as a reminder to myself and my kids. I’m in the ‘millions’ category, and it can be stressful at times to see $100k disappear in a week.

      That’s as much as I made in a year back when I was working!

  • March 31, 2018 at 10:21 PM

    Nice reminder, Mr. Tako. In 20 years, none of this will matter, so may as well not mind it now! I was off enjoying the mountains for Spring Break with my family when the markets tanked. When I came home I noticed some interesting headlines about the DOW dropping nearly 1500 points in a few days. By the time I came home, it was already in the past and Mr. Market even surged back a bit.
    Michael @ Financially Alert recently posted…My Amazon FBA Project: Part 4 – Rinse and Repeat

    • April 1, 2018 at 11:57 AM

      Exactly! Unless you have fresh dollars to invest, there’s no reason to worry about what the market thinks. The health of the business (or other assets) becomes far more important in the long run.

  • April 1, 2018 at 4:45 AM

    Mr. Tako,

    I really love the picture at the top of this post. Having been to Bryce Canyon, this is a great photo that mixes up beauty and creativity that ties back into the post title. I am inspired!!!

    You are right, focusing on the dividend growth or dividend payments YOY is the way to go. Already I’m forecasting 2018 dividend payments to be 15% YOY over 2017, maybe higher. That alone allows for one to sleep well at night in spite of the volatility.

    Having more money to invest would be nice, as volatility is your friend on the buy side.


    • April 1, 2018 at 11:55 AM

      Thanks Mike! I wondered if anyone would actually ‘get’ what that picture was all about. Just like the incredible features of Bryce Canyon, market volatility is very much a natural phenomenon — sometimes both frightening and beautiful.

  • April 1, 2018 at 6:54 AM

    So you’re saying I should cash out of the market once it tanks? 😉

    This is the first time around that a lot of folks are going to experience a market downturn (at some point). I’m an old man and remember a couple of ’em! 😉

    It’s easy to think you can hang when the tide changes, but if the bottom drops out, people panic. And because of that, they end up losing big.

    — Jim

    • April 1, 2018 at 11:50 AM

      Absolutely. I wrote this post primarily for my kids (who won’t have the same experiences us old guys do), but it’s a good reminder for myself when the market has a bad couple of years.

  • April 2, 2018 at 12:38 AM

    Very curious to see how I will handle the next recession/major market correction. Probably feels horrible to see your portfolio halved in a matter of months. But fortunately we do focus primarily on the stable dividend players, which should still do fine during down years.

  • April 2, 2018 at 8:38 AM

    Thanks for this post, Mr. Tako! I too am a fan of Professor Siegel’s work. This reminds me, I need to finish Stocks For The Long Run. A great read as well. Keep calm and dividend on, indeed.

  • April 2, 2018 at 12:19 PM

    You are perfectly right Mr Tako – the best way to deal with the situation is to ignore it.
    That said it’s also good to diversify investments, eg have a rental property or some other income stream. That way if there’s a longish bad market you can fall back on the other eggs in your other baskets 😉 fingers crossed for us all!
    Mrs Smelling Freedom recently posted…Break Bad Habits and Create Good Habits Instead

  • April 2, 2018 at 4:53 PM

    The markets have been volatile alright. Every other day I’ve read headlines about stocks surging then plunging then soaring again. You know, like soaring 0.5% or plunging 1.0%. There is so much hype in market commentary these days!

    Thanks for the reminder though – despite a good dose of calming when markets have their next 20-40% downturn I’m curious as to how I’ll respond.

  • April 3, 2018 at 12:32 AM

    Thanks for these excellent advices, again 🙂

    In the end, long-term results are what matters. Even if it’s frustrating to see the the net worth go down, and hence the goal of early retirement.
    The Poor Swiss recently posted…My Financial Independence (FI) Ratio

  • April 3, 2018 at 9:58 AM

    I’m finding that my typical “buy the dip” behavior doesn’t work as well if the overall trend is heading downward.

    I deploy a lot of cash on a down day…and then later in the week, it drops even further. My instinct is to again find cash to deploy…and it happens again!

    I’m having to remind myself that simply investing regularly is the best I can do.

    • April 3, 2018 at 10:38 AM

      This is the big challenge for a great many investors — “At what price do I buy?” The price can always continue to drop!

      I’ve heard a number of strategies like “investing regularly”, “averaging down”, “don’t average down”, “buy based on normalized earning metrics” and so on. But none of these strategies are entirely fool proof….

      Which begs the question — How do we not be complete fools? 😉

      Ben Graham had particularly good thoughts on this subject.


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