How do we know when we hit bottom? Hopefully, as a long-term investor, you aren’t paying attention to the daily ups and downs of the markets. Even if you try though, when markets are as volatile as they have been it is hard to miss the updates when you catch up on world events and other news. Humans tend to feel the pain of negative news more than we feel the uplift from good news, so we internalize the downs more than celebrating the ups. As a result, it can feel like we have taken a knock-out punch rather than a gut punch.
The markets are trying to digest an enormous amount of new information including the Federal Reserve’s actions to fight inflation, inflation itself, the war in Ukraine, gas prices and more along with the normal cycle of corporate earnings. Traders in particular are trying to guess what is going to happen next and maneuver accordingly. Lots of guessing means lots of adjustments and that means lots of volatility. It is important to recognize that these adjustments ultimately lead to healthier markets going forward and that helps long-term investors who have the time to ride out these cycles. Less-richly-valued stocks means more opportunity going forward and higher-yielding bonds means more income down the road. These are both good things but the process is painful to get there.
The under current in the market is a steady drumbeat of negative news but there are a few things to remember as you try to navigate your emotions through these periods in the market.
- Markets always recover; they always have and they will again. (Blog: In All of Time)
- Markets usually over-correct, so they will go down more than they need to because of fear.
- Long-term plans anchored around your future goals barely budge because they assume both ups and downs in the market. (Blog: Volatility is Back!)
- Investors manage through downturns with opportunistic actions that build long-term value. (Blog: Managing versus Guessing)
- We will never recognize the bottom except through the rear-view mirror and there is usually no “event” that triggers it.
When you have been investing for a long time, one of the skills that you build is managing your emotions through market cycles. You learn to be a bit of a contrarian. You recognize that markets must go up AND down so these cycles are normal and to be expected. None of us will recognize the bottom except through the rear-view mirror but we should get MORE optimistic the further the market goes down knowing it means we are closer to that elusive bottom.