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5 Reasons Stock Market Volatility Makes You a Smart Long-Term Investor

Mark Zaifman   |    Mon, Oct 20, 2014 @ 05:57 PM

investment planning strategy ma

If recent stock market volatility has you wanting to hide under the covers, you’re not alone. The 2009 stock market crash was a traumatic experience for investors as many watched their life savings plummet dramatically in a relatively short period of time.

And now, with the recent volatility, memories of those scary days still haunt many an investor that rightfully so, remains traumatized from that roller coaster ride from hell back in 2009. The thought that runs through many a mind in times of high volatility and high anxiety like we’re currently experiencing; is this going to be a repeat of 2009?

Since no one truly knows what the future holds, allow me to take a contrarian view and present five reasons why the recent stock market gyrations are a good thing and why a registered investment adviser like myself embraces the volatility and sees it as a healthy sign for markets instead of doom and gloom.

1. Opportunity or Crisis?

Emotions play a crucial role in your investment success. Behavioral finance has become a very hot topic as scholars attempt to understand what drives investors to sabotage their success and often make financial decisions that cause serious damage to their financial security.

And what’s the most destructive emotion when it comes to being an investor: FEAR! Fear will activate the fight or flight portion of your brain and once that kicks in, rational decision making gets thrown out the window.

So instead of letting fear emotionally hijack you, use this current volatility as a learning opportunity and not a crisis. If you’ve made reactive financial decisions in the past out of fear, now’s the perfect time to look inside of yourself and say enough is enough. I will no longer let fear rule my life and especially my financial decisions. Use this teachable moment as a reason to do some inner work on yourself and I promise it will be one of the best investments you’ll ever make.

2. Dollar Cost Averaging

If you contribute to a 401k or 403b on a regular basis, you are essentially dollar-cost averaging throughout the year. Some months your contributions will be invested when the markets are high, some months when it’s low, and right now, when it’s really low. That’s the beauty and simplicity of this investment strategy.

So reason number two as to why you should love this recent volatility; thanks to the recent pullback, the stock market is having a 10% off sale and you’re invited. The same funds you have been contributing to all year long are now in many cases 10-15% off their ‘original’ price. And who doesn’t love a bargain?

3. Are You Taking Too Much Risk?

Three weeks of decline in the stock market have broken the almost unprecedented calm that had enveloped markets for most of 2014. It’s been three years since the S&P 500 has posted a decline exceeding 10 percent over any period of days. So it sounds odd, but this downturn, in my opinion, is just what the markets needed. Let some excess out now so markets can head back up later.

Now’s the perfect time to take a pulse of your risk tolerance as well as risk capacity. First, have you been able to weather the recent volatility without feeling the need to make any changes to your investment strategy? And if the market were to drop another 10%, do you have the capacity to withstand that drop or will it cause you to have to make any drastic lifestyle changes you weren’t anticipating?

Now’s the time for an honest self-evaluation of the risk you’re taking and adjusting your portfolio accordingly if needed.

4. Margin Calls

There’s a reason most hedge funds have taken it on the chin with the latest market downturn and are down around 16% for the year. Most hedge funds are highly leveraged, meaning they borrow large sums of money to wager in the markets.

The same is true recently for many investors as margin loans have been going through the roof this year. Why? Because when markets stay calm for too long, it seems like a piece of cake to make money. So why not borrow even more money and double down or maybe triple down on the market and you’ll look like a genius, right?

Well now the inevitable has happened to loads of investors and that’s the dreaded margin call. Either put more cash in your account by tomorrow, the broker says to his client, or we’ll need to liquidate your holdings Mr. Jones, and have a good day.

Draining some of the excess speculation that has grown way too high for my liking is reason number four to love this volatility.

5. Stress Test Your Investment Strategy and Your Financial Advisor

If you have taken the time to design and develop a comprehensive financial plan, the odds are high you have a well thought out, diversified investment strategy that performs as planned during volatile periods like we’re experiencing.

Now’s a great time to see how your strategy has held up. Is the value of your portfolio down relative to the market or are you an outlier with a much larger loss? Is your asset allocation in line with your risk tolerance and risk capacity or have you deviated from your strategy so much that you now own a highly aggressive portfolio?

Do you feel confident that your financial advisor knows what they’re doing and has a steady hand at the wheel or is he or she making erratic trades and seeming more stressed than you?

My clients are all long-term investors, all of them. That doesn’t mean some don’t get spooked when the markets become so volatile, and I expect that. But what all of them have in common is the knowing and comfort that we have taken the time to develop and construct a customized investment strategy that aligns with their values and in this market most importantly, aligns with their capacity and tolerance for risk.

Bottom line - use this reason as well as reasons one through four and challenge yourself to become a smarter, more emotionally intelligent, long-term investor. It will be one of the best investments you’ll ever make.

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