Is the Market Making You Motion Sick?

by William “Marty” Martin

‘‘What is important in market fluctuations are not the events themselves, but the human reactions to those events.’’  Bernard Baruch

    Nobody needs to be told that the markets are volatile. The CBOE Volatility Index, known as the “Vix” or Wall Street’s “fear gauge” jumped in the summer of 2011 to its highest level since the financial crisis of 2008. It is not unusual for the Dow Jones to gain 100 or more points in a single day and then fall 100 more points the very next day. Up and down. Down and up.

    If being invested in a wildly unpredictable stock market freaks you out right now, you’re definitely not alone. Investing today can feel akin to being motion sick. The term motion sickness was originally introduced to provide an umbrella term for symptoms associated with car sickness, sea sickness, train sickness, and swing sickness.

    Motion sickness is often equated with nausea and vomiting. Market volatility does not result in the same physical symptoms as motion sickness. Yet, it does not feel good physically or psychologically.

    And when you’re feeling sick, all you want is instant relief. Yielding to a strong urge for instant relief, you may make a decision that is best for the “here and now” but not for the long run. Far too many investors seek to relieve their market motion sickness by pulling out the stock market. With no money in the market, they feel instant relief. But sometimes it is worth staying in the boat in the rocky waters if you want to reach your destination—the harbor of financial security.

    To avoid pulling the plug on your investments when you’re feeling motion sick, consider these five recommendations to help you relieve the market motion sickness and reach your destination—your lifestyle and financial goals.

1. Take out your Investment Policy Statement (IPS) and remember the investment map you created when the waters were calm.
2. Take a look over a longer time horizon, and avoid looking at what is happening now, because it is bound to make you feel worse. This will only impair your judgment and decision making.
3. Diversify your investments remembering that in most cases (although not all) there are some parts of the market that are calmer than others. Focus on the calmer parts of the market rather than the more turbulent ones.
4. Automate your decisions so that you are not pulled by the random forces of the turbulent market. Rehearse what you will do and how you will react if the market forces increase in volatility and the swings from high to low get greater and greater. To prepare in advance of the actual event often results in a less extreme and impulsive response.
5. Reflect back to a time when you or someone you know experienced market motion sickness. Remember the misery caused by the market’s short-term volatility? Looking back, you should see the wisdom of viewing your investments from a long-term perspective.