How to Stay Calm When Markets Are Not

The market certainly whipsawed its way through the week as investors weighed many concerns--among them China's market meltdown, slowing global growth, and the possibility of a Fed rate hike. The Dow lost more than 1,000 points at one point on Monday but recovered some of those losses to lose "only" 588 points for the day. Then Tuesday, the Dow bounced back, gaining more than 430 points at one point, but gave back all of those gains and more, ending the day 215 points below where it started. Wednesday, the Dow roared back, gaining more than 600 points ... Are you motion-sick yet?

This week, we checked in with our readers to hear their top tips for staying cool during market turbulence. We know that staying the course is not always easy, so we asked readers what productive ways they've found to deal with market shocks. On the flip side, for those who did decide to take action (buying or selling), we wanted to know how they decided to do so.

Many readers revealed that throughout decades of investing, they have come to understand themselves and their own unique investing psychologies. Some have repositioned their portfolios in a way that suits their risk tolerance and made sure that their current income needs are well covered. Doing so allows them to stay calm as market turbulence unfolds because they aren't anxious to unload securities at prices below what they think they are worth.

Others mentioned that the silver lining of the sell-off for them was that some high-quality stocks on their watchlists were starting to look more attractively valued. A few respondents said they had made some larger portfolio moves as a result of the sell-off, including moving into cash to scoop up equities at a lower cost basis. But many other buyers noted that they were taking advantage of lower prices to increase their allocations to high-conviction investments they already owned, in line with their investment plan.

Here is a summary of what our readers had to say. To read the complete thread and weigh in yourself, please click here.

'I'm not cool at all--that's why most of my money is in bonds and I love it.' The above response, which comes from FD1000, illustrates a principle that many respondents echoed: Know your own risk tolerance and make sure your portfolio is as conservative as you need it to be. Also, make sure your current income needs are more than covered. Doing these two things has allowed many readers to ride out the rocky patches without hitting the panic button.

"The key is in having an asset allocation that allows one to not react badly to market corrections," said dragonpat. "I had a 100% stock portfolio until November 1999 when I could not stomach it anymore. I went to a 60/40 stock/bond allocation and recently to a 70/30 one, and I have not been tempted to go to a 100% stock allocation since then."

"As a younger retiree, I rely on portfolio income and have a long time horizon, so while I have plenty of equity volatility my cash and bond holdings mean I don't have to sell volatile assets," said JupiterMars. "When I need to keep a cool head, I focus on the annual income from the portfolio rather than the aggregate portfolio value."

"My asset allocation is designed to be psychologically market-neutral," said Darwinian. "If stocks rise, I am happy, because my stock allocation captures this rise. If stocks go down, I am happy, because this allows me to apply my bond allocation to buy cheap stocks."

Ditto for artsdoc: "I've experienced the 2000 and 2008 meltdowns, and have an asset allocation that suits my needs. I have found that sticking to a plan--preferably that is written down--takes the emotion out of the process."

JHAsheville says, "I feel secure maintaining a portfolio somewhere between 50/50 or 60/40 with a healthy dose of cash in the mix to take care of a couple of years' worth of needs ... No fuss, no muss!!"

"First we remember we keep cash and short-term bonds and CDs to cover our needs for spending money above [Social Security] and pension for several years," said retiredgary. "Second we remember we are investors who own stocks not for what they will trade for in the next six months but to participate in the growth and profits of companies over many years."

"I keep a generous cash bucket to cover living expenses and investment opportunities. Just checked and at this moment it covers 6.66 years of expenses (if stock/bond/fund distributions were zero)," said bnorthrop. "I focus on the fact that my strongest gains were made when I didn't flee the market during big downturns but continued to invest. ... In the end, reality wins."

'You don't lock in any losses unless you're foolish enough to sell.' This advice comes from FedEngineer, who advises having a sensible plan, sticking to the plan, and riding out the turbulence: "Don't sit there watching your portfolio value fluctuate; that's crazy-making. Do something else. Read a good book. Learn macrame. Memorize some poems. Learn Portuguese. The value of your portfolio will go back up and in the meantime you've read a good book, made a nice plant-hanger, learned some poems, and found out how to say 'good morning' in another language."

"I'm retired and I need income from my investments. But I don't need it all today, immediately, now. I do not trade when all hell is breaking loose in the market," said Juris2.

"The worst mistakes I have ever made in the past 30-plus years is selling at the worst time, and I never got back in at the right time," said hondo.

"Here's how I explain it to people who know nothing about stock investing, except for the horror stories," said Bruzer. "Let's say times are normal and your house has a fair market value of $200,000. Along comes some housing bubble, a recession, or whatever that makes it less marketable. Its value drops to, say, $150,000, give or take, for a couple of years. If you're not trying to sell it, so what? You STILL OWN THE ASSET."

Still, it's not easy for an investor to develop this discipline. This advice comes from retired at 48: "A young investor who is 100% stock funds is getting vaccinated with severe market falls, to where they learn to deal with it. (And if you can't deal with it, you know stocks may not be for you). Then, when you EVENTUALLY have a million-dollar portfolio decline 30%, you can still carry out the mantra of DO NOT SELL."

'When markets crash, I buy more.' ShakAttack summed up what a lot of other respondents pointed to as the upside of a downturn: bargain-hunting. Many readers said that they buy assets in which they have strong conviction in the first place, which makes them easier to stick with through the lean times. And when those high-conviction picks are trading at a discount, they look at that as an opportunity to scoop up some more.

"I own quality stocks that grow their dividends that get reinvested. If I like ABC at 25 and the only thing that's made it go to 20 are real and/or imaginary fears over China, I will back the truck up and buy more in a heartbeat. And with a 20-30 year horizon, I am OK with that," said rforno.

This comes from proxysteve, who notes that it doesn't pay to think of equities as "a bank account returning interest": "For individual stocks I look at the business and the performance of the business first, and the price I can buy and sell second. If I have a great business and it's gone down, it just represents a great opportunity to buy more. If it turns out to not be a great business, then I sell."

"If 'cool head' is synonymous with doing nothing, I don't want to 'keep a cool head' during volatile markets. I want to take ADVANTAGE of other people's hysteria and ill-timed sells," said Gatorbyter. "When it drops 10%, if you have some extra money, you reach over and pick up some shares of a couple of good companies."

YouBro agreed, adding: "It's hard for me to keep a 'cool head' in volatile markets, because I get so excited when these great buying opportunities come by! But then, I remember that my asset allocation has to come first--this helps me to close the checkbook after some spirited but reasonable buying."

"I do have a few stocks that have been on my watchlist and may pull the trigger soon if they go down a bit more," said KitCat. "I have a while before retirement and the shortest time I've held a stock or fund is three years."

"I tend to buy stocks I'll be happy to own on declines. I find myself getting out of stocks I'm not convinced about," said ashokgoyal42.

'Beer.' Finally, the above response, from bo0bo0, serves as a reminder that one effective antidote for stress is maintaining one's sense of humor. In that vein, here are some other responses to our query about staying cool during volatile markets that made us smile:

"All I ever needed to know I learned from The Hitchhiker's Guide to the Galaxy. Right on the cover, it says: 'DON'T PANIC,'" said xBanker.

"Pretty much what most people have already noted here," said ridg0008. "But I also pull out something from my Irish whiskey collection."

"Eighteen holes of golf early in the morning. Burger and a couple of beers," said newtogame.

"My new philosophy is to print out all of the above comments and read it every morning during 'bad' times and allow my frayed nerves to recover," said Surama.

And (my personal favorite) from homebrewer: "I homebrew and my wife makes wine; so what was the question?"