- Riding volatility is like riding an emotional rollercoaster but it can always work in your favour.
- Sometimes what you don’t know can’t hurt you. Long-term investors should refrain from checking daily prices to avoid short-term angst.
- Losses are only realised monetarily and emotionally if you sell.
- Fundamental analysis might not be fun but it’ll help you sleep better at night.
When a certain virus drove us all to adopt hermit-like lifestyles in 2020, some of us were reluctantly gifted with what seemed like endless time on our hands and for the first time, inconveniently more money in our pockets.
First-world problems at its finest, more time with nothing to do and more money with nothing to spend it on became a burden both psychologically as well as financially.
Once Tiger King was fully binged, reality sunk in: 2020 was going to be as contemptible as Carole Baskin and as dreary as Joe Exotic’s music. To escape the bleak reality of 2020, some learned a new language while others concentrated their meticulous attention on tending to their gardens.
But if the lockdowns weren’t enough of a test of patience and mental endurance, some took it upon themselves to plunge into the perilous waters of the stock market.
They can’t be blamed either; bank interest rates were, and still are atrocious and there’s only so much one can spend on tomato plants, hand sanitisers and toilet paper. Just like the stockpile of bread loaves they panic bought, their money was slowly going stale.
Stocks were a bargain in early 2020 too, with discounted prices being too tempting to pass up even for the most frugal of penny-pinchers.
The pattern has continued into 2021 as well. Millennial-friendly trading platform Robinhood attracted 3 million new users during the first four months of the year. Futu – China’s answer to Robinhood – just reached 15 million global users too, with revenue growth of 129.3% to USD 203.1 million. The market for newbie investors is growing rapidly, inadvertently exposing the unexpecting to new levels of stress.
Unbeknownst to them, and largely unacknowledged to investors in general, investing in the stock market is a mental game rather than a financial one.
Whilst clicking buy and subsequently clicking sell are rudimentary actions that don’t require Zuckerberg-levels of tech proficiency to process, the thinking behind pulling the trigger is far more complex.
In an effort to escape from lockdown anxiety and financial woes, many sought solace in the stock market, unintentionally exasperating their stress and throwing themselves from the frying pan into the fire.
Being the kind people we are at Bread and wholesomely sympathising with your plight, we’ve collated some mental health tips to alleviate your angst, whether you’re an investment newbie or seasoned stocks guru.
Volatility is your worst enemy or best friend
No one likes seeing their stocks decline, or worse still, enter the red zone. That gut-wrenching feeling of regret can overwhelmingly consume you.
“If only I’d waited”, “I’ve caught a falling knife”, “I’m actually losing money”, “The bank’s 0.2% interest looks good now” are all thoughts that swirl around your head like a flushed toilet bowl.
Volatility compounds this aggravation, teasing false glimpses of an upside movement that would resolve you from your seemingly moronic decision to buy at such a high price. However, just as a whale breaks above the surface for a brief peek at the sky, your hope is short-lived as it returns to plunging to new depths.
Contingency instincts kick in: do you sell now, take the loss, and save face before it reaches new lows? Or does the upward volatility suggest it could bounce back, resulting in a double failure if you sell low?
Volatility can certainly be a cruel mistress.
Nonetheless, changing your thinking about volatility will save you hours, if not days, of heartache.
Downward movements are not necessarily negative movements. If you bought the company already, one must assume you had good reason to do so. You must thereby have conviction in the reason behind your confidence in the company.
For example, if you believe the company will be in a stronger financial position in the coming years, its stock price slipping in the short term is nothing to worry about.
In fact, if this is true, downward movements simply offer an opportunity to buy more of the company at a discount.
Consider this: a dashing two piece suit at the mall caught your eye but you were only willing to fork out for the swanky blazer. You return a few days later and the trousers are discounted 40%. Buying it now will not only compliment your outfit but will result in you owning a lavish suit for cheaper than you first saw it.
This analogy draws parallels with the stock market. Buying again at lower prices will reduce your average and set you up even better in years to come.
If you don’t have more capital to deploy, this is a lesson to keep cash on the side for opportunities such as these. Even if you’re maxed out, don’t let volatility obfuscate your vision for the company’s future – it will pay off eventually.
Remembering that volatility offers bargains rather than detriment will keep your mind at ease.
Ignorance is bliss
Relentlessly checking your stock prices to reaffirm your buying decisions will drive you up the wall without driving your portfolio up. Unless you’re a day trader, there’s really no need to constantly refresh your watchlist’s stock prices.
Benjamin Graham’s profound Mr Market analogy serves its purpose here. Graham states that the market is like a highly erratic, emotional person. Allegorised as Mr Market, Graham teaches that just like people, the market has its mood swings.
When in a euphoric mood, he pumps out high prices and equally, when in a foul mood he offers low prices. Upon repeatedly seeing his prices, the foolish investor would act on these mood swings rather than the bigger picture.
Among his many qualities, Mr Market nonetheless has a redeeming and rather endearing characteristic: he doesn’t mind being ignored. If you ignore him today, he’ll still come back with another price tomorrow.
You can ignore him or take advantage of him, but just don’t fall under his influence.
“In the short run, the market is a voting machine but in the long run it is a weighing machine,” Graham quite accurately said.
Investing cult icon and veteran Warren Buffett follows Graham’s advice and ignores daily and even yearly price quotations. Instead, he plays the long game and isn’t influenced by daily price fluctuations.
While we’ve been reluctantly blessed with more time on our hands due to lockdowns, our time is best spent not staring at stock prices all day. Ignore it, come back in a month, if not a year, and you’ll save yourself a lot of aggro.
You only lose if you sell
It’s certainly uncomfortable seeing red in your portfolio. Your fight-or-flight instinct kicks in and naturally, you’ll want to do something to address the “loss”. But in fact, you’re only making a loss on paper (or on screen).
Losses are only realised upon selling. Until you sell, the stock still has the potential to reverse its direction. Again, conviction is key here.
Believe in the company and remind yourself why you bought it in the first place. Failure to do so will end doubly poorly if you sell: you’ll realise the loss and will be unwillingly forced into a cuckold relationship with the stock as you watch it rise as it satisfies other people’s portfolios.
Do your homework: the fun of fundamental analysis
This is less of an adjustment to your thinking but will nevertheless do wonders for your mental stability.
Carrying out fundamental analysis to comprehensively understand the company you’re investing in is crucial. If you understand its financial position, you’ll be in a better position yourself to digest why its stock price has declined.
Perhaps a lunatic analyst set an unrealistic expectation leading up to a company’s earnings, triggering its stock price to free fall when it fails to meet an impractical target. Equally, the company’s CEO might send out a senseless tweet, temporarily emitting a musky (no pun intended) haze over investor sentiment. In either case, fundamental analysis will help you determine whether the company’s fundamentals are at risk, and whether your panic is justified.
Having a firm grasp of the company’s situation will help you gauge the company’s performance, enabling you to filter out any short-term noise.
However, fundamental analysis can be dry, and in all honesty, requires a certain level of financial aptitude. That said, it’s worth the effort and mastering it will help you to master the mind matrix of the investing game. Fortunately, with the glorious invention of the internet, a wide array of materials teaching you about fundamental