How to handle stock market fluctuations

Have you checked your portfolio recently? If so, you’re not alone if the sight of your investments’ performance ruined your day.

January was the S&P 500’s worst month since March 2020, closing the month down 5.3%. 

More than two-thirds of the companies within the index were down at least 10% from their record high and 149 stocks were down 20% or more.

Losing money can be an extremely painful psychological experience and the fear of it can cause us to respond in an irrational and impulsive way. 

Spur-of-the-moment decisions such as selling at a loss can compromise our ability to build wealth for the future, so it’s important to respond to volatility with a clear head. Read on for our guide to handling stock market fluctuations.

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Acknowledge your feelings… and let them go

If volatile markets leave you feeling stressed or anxious, congratulations, you’re human!

As humans, we’re hardwired to respond to external stimuli. We cough if there’s smoke in the air for a reason. If our bodies were to ignore it, we’d soon pass out from smoke inhalation.

When you feel anxious, this is your body’s way of telling you that there’s something wrong and you must react quickly.

There’s just one problem: reacting quickly to changes in the stock market is rarely the right thing to do. We need to plan five, ten or twenty years into the future if we want to achieve our goals.

Planning ahead used to be a useless skill in prehistoric times. Back then, the main focus was on surviving one week to the next. Responding to outside stimuli was sometimes the difference between life and death. Thankfully, stoicism is much more rewarding these days.

Remember it’s only a loss if you sell

When markets fluctuate, it’s not uncommon for investors to focus on the quantum, “I’ve lost £20,000 overnight! Whatever will I do?!” And ignore the historical gains. 

But, this short term loss is really only a loss if you sell. Hang on a while longer and give the market a chance to recover. Fluctuations like this have happened countless times in the past and often the sharper the decline, the faster the recovery. The market comes back even stronger.

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See it as a buying opportunity

Instead of seeing stock market fluctuations as a bad thing, try to think of the down periods as a buying opportunity. Stocks are on sale right now, so it’s the perfect time to snap them up. If you can. 

At the same time, avoid trying to time the market. Making the most of a dip when it happens is smart but waiting until the market goes down before you invest will only see you missing out on valuable growth opportunities.

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Focus on the plan

At Barnaby Cecil, we put a lot of thought into the plan we’ve created for you. Our Navigate Portfolios are designed to give you the best chance of investment success.

Unlike others, we don’t react to the day-to-day movement of stock prices or follow the ‘flavour of the month’ investment strategies. 

Instead, we like to pick a plan and stick with it. There’s no point in chopping and changing with no rationale behind your decisions.

So, when you find yourself reading sensationalist headlines or scrolling through stock market forums, remember it doesn’t have to be this way.

Think about the plan you created in the beginning, rather than focusing on the numbers on your computer screen. Your portfolio’s job is to serve your plan, but it’s not the be-all and end-all. Its purpose isn’t to make you feel wealthy. It’s to help you get to where you want to be - and it can do that despite the occasional dip.

I like to compare market turbulence to Formula 1. People pay attention when there’s an incident on the track, but they’re rarely concerned about the petrol that’s fuelling the cars and making them race around in circles. 

Like the petrol, your portfolio is simply the fuel that propels your plan forward. Whatever has happened to markets recently, companies are still generating sales, reducing their costs and increasing their profits. 

What really matters is the plan, at the end of the day. If there’s something wrong with the plan, we can revisit it, but we certainly aren’t going to panic sell our investments at the first sign of trouble.

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Zoom out

If all else fails, zoom out. Instead of focusing on the last few weeks, look at global markets over a period of 20 or 30 years. 

It can be helpful to focus on the annualised returns in your portfolio too. If you’ve been investing for a long period of time, annualised returns are much less sensitive to short term movements as they calculate the average return. Recently, we have not found a client who has dropped below the figure they require to achieve their WealthMap plan. Even after the market falls. 

The image below shows how resilient the stock market is to fluctuations - even when driven by unprecedented events such as the dot-com crash, Brexit and the pandemic. 

It always bounces back, so you’ve got to learn to ride the waves rather than trying desperately to fight them. 

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