When the news turns grim and market volatility increases, it can feel like uncertainty is everywhere. Scroll through the headlines and it makes sense why investors feel uneasy.
A war in Iran and an ongoing conflict between Russia and Ukraine have led to a surge in global energy prices, sparking fears of higher inflation. Evidence suggesting tariffs put on imported goods have been passed through to us, the consumer and small business, putting further upward pressure on inflation.
Recently reported weak job growth may be signaling a slowing economy. Combine all these concerns and we have the makings of 1970’s stagflation: slow growth and high inflation. Truckee, and our region more broadly, are not immune to these global influences.
The recently released Business Listening Tour conducted by the Truckee Chamber of Commerce reflects these concerns. According to Chamber President and CEO Jessica Penman, chamber members report thinning margins while revenues remain steady. These anecdotal reports likely reflect cost pressures due to tariffs, among other influences.
With stories like these, it is a normal reaction to wonder, “Should I be doing something with my investments right now?”
This reaction stems from the same fight-or-flight instinct that helped our ancestors survive physical danger. When we feel threatened, our natural response is to react quickly. While a market decline is not a physical threat, our brains can respond as if it were. When portfolios fall and uncertainty rises, the urge to act can be strong.
Feeling uneasy during volatile markets is completely normal, but reacting too quickly is where many investors get into trouble. Looking back at the last 100 years, some terrible things have happened: among other events, a depression, a world war, an assassinated president, an oil embargo, a global financial crisis, a pandemic, and yet the market keeps moving upward, although not in a straight line. While every downturn feels unique in the moment, history tells a consistent story — disciplined investors with a thoughtful plan are rewarded for staying the course.
A sound investment strategy does not rely on predicting the terrible thing. Instead, it is built on accepting that terrible things do happen, and that markets will process the information, look forward, and adjust accordingly.
Our reaction to market fluctuations is one of the biggest challenges in investing. The biggest influence on our portfolios is not investment performance; it is investor behavior. We are emotional beings, especially when it comes to our money, and human behavior often works against us during volatile periods. Recognizing how emotions and psychological biases can influence financial decisions is a valuable skill.
One of the most common biases we carry is loss aversion, the tendency to feel the pain of loss more strongly than the satisfaction of gains. Discomfort like this can trigger a strong urge to act, to sell, or to wait until things look better. Unfortunately, these decisions are often made after markets have already declined rather than before. And because markets are forward-looking, by the time “things look better,” a recovery is well underway. This is a sure way to go broke by selling low and buying high.
Two other behavioral traps that frequently appear during volatile markets are herd mentality and recency bias.
Herd mentality occurs when investors act based on the actions of others. If everyone around us seems worried, that anxiety can spread quickly. If others are reacting to the headlines we are also seeing, it makes sense to feel that we should be doing something too. Following the crowd has historically led to poor investment decisions.
Recency bias is the tendency to place weight on recent experiences and assume they will continue indefinitely. The most recent experience influences our perception of risk, and, during downturns, investors may feel things will only get worse. Conversely, during strong rallies, confidence grows and risk-taking increases. Neither is a healthy long-term investment approach.
Two time-tested ideas should guide your investment philosophy. First, markets tend to be remarkably efficient at incorporating available information into prices. Second, diversification matters. Since none of us has a crystal ball and we cannot predict which sectors or countries will outperform next, it makes sense to hold highly diversified investments. If not at least one of your investments is making you mad all the time, you are not diversified.
Investing, in many ways, is about preparation. Living in the mountains, we do not wait until the first snow to think about firewood or snow tires. We prepare ahead of time because we know that winter storms are inevitable.
Markets work the same way. Portfolios should be built not just for sunny days, but for the storms that inevitably appear. And when the storms arrive, as they always do, the investors who prepared ahead of time are usually the ones best positioned to stay calm, stay disciplined, and stay invested.
~ Jessica Abrams and John Manocchio are CFP® professionals with Pacific Crest Wealth Planning serving the Truckee/Tahoe region. Both Jessica and John are passionate about their community and volunteer service. Jessica is an active member of the Rotary Club of Truckee and John is an active member of the Truckee Optimist Club.
