Staying calm when market plunges?

Just as emotion is part of human, volatility is part of stock market.

Maybe that’s why many are drawn to the market; to experience the emotion roller coaster. Or I should say most want the excitement but not the anxiety that comes with it. Unfortunately, they come in a package.

The capability to regulate our emotions definitely plays a part in determining our performance. Not just in the market but also in other aspects of life. A good analogy would be sports. If two competitors are similarly skilled, the one that is able to calm his nerve will typically come out top.

It’s not about having no greed or no fear but being aware of their presence and regulating them. Awareness itself would likely to prevent us from taking immediate actions, and provides the necessary time for our pre-frontal cortex to deliberate and make decision.

Doing mindfulness exercise or mediation helps to increase the awareness but it takes regular practices to make improvement. What can help too is setting up an environment or system to help our brain.

How to stay calm when market plunges?

The market has not been too kind for the past few months. Both SPY and ES3 have dropped by about 7%. It is not only the actual drop that caused anxiety, the jittery also comes from anticipation of further drop.

Like many market participants, I don’t feel good seeing the drop. Primarily because without active income, I don’t have new money to take advantage of the opportunity. Besides that, I am pretty nonchalant about the short term market movement as I have planned for such situations and so my brain doesn’t over-react to them

Sufficient Cash Flow

Having enough cash flow so that I can go on with my normal life is utmost important to me. In the past, I depended on my active income and emergency fund. For now, I have set aside 3 years of expenses so that I do not need to draw down on my investment. The current higher interest environment is a blessing in this sense as I am getting more bucks for my cash.

Conservative Asset Allocation

The general rule of thumb on the percentage of asset to invest in equities is 100-age. Some use 110 and as I search about it, some even use 120? Since it is just a guide, I prefer 100-age as it is simple for my mind.

In the past, I never bother about asset allocation. When younger, it really wasn’t important to me. After setting aside the necessary emergency fund, the rest went to stock. I did not see the need to invest in bond as CPF naturally acts as the “bond” portion of the asset.

Thing is different now that I am approaching 50. I love investing in equities but at the same time with a shorter runway, I do need some lower risk assets to preserve what I have accumulated over the years.

At the time of writing, only 45% of my asset are in stocks, unit trusts and ETF. Which means that even if market is to crash by 50%, I will still have near to 80% of my asset intact. That’s comforting and it allows me to ride the volatility of the stock market. Of course it does mean lower return on my asset but getting a higher return is not my priority now.

Know the Companies Well

There are different players in the market and we are playing different games in the same venue. More often than not, we cannot understand the moves made by each other because we are playing to different rules.

Knowing the companies I am vested well would then provide me with the confidence to assess if the price movement reflects the performance of the underlying business correctly.

I feel the emotion but I am not sway by it, as I know what to do.


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