5 Investment Principles to Manage Your Stock Market Anxiety

The typical clients that I work with - other professional women and dual-career couples in their 30s and 40s - have started to pay closer attention to their investment portfolios in this season of life. As their careers and income streams have grown, so too has their ability to save more aggressively into their investment accounts and put that money to work in the stock market.

For better or worse, growing investment account balances mean the potential for larger swings in those portfolio values as markets inevitably get rocked by short-term uncertainty.

On top of that, the dramatic financial headlines tend to stoke fear and anxiety about a situation that is largely uncontrollable, yet the majority of investors are not equipped with any basic investment principles to weather the stock market storm.  

I’m sharing five investment principles to help you manage your stock market anxiety and lead you to cultivate a better investment experience overall. These represent the core of the evidence-based philosophy that I follow when it comes to investing for my family and for the client families that I serve. 

1. AVOID TRYING TO PICK STOCKS OR TIME THE MARKET.

Chances are high that you have friends or family members who tell frequent stories about picking the next hot stock. Or perhaps they’ve sold out of everything and gone to cash to avoid a market downturn, much like the bear (i.e. declining) market we’re currently experiencing. And then of course there’s all of the bitcoin mania.

It’s very tempting to get pulled into these trends, like trying to time the market or otherwise guess how individual stocks will perform, when the world around us has done a pretty good job of normalizing this behavior.

Let’s define this crystal-ball approach for what it really is though: nothing more than speculation.

Sure - it’s human nature to want to play the stock market from time to time, and for clients that have an interest in this I usually suggest having a small speculation account (5% or less of their investable assets). We just need to recognize and accept the mountain of evidence that goes against this approach.

Conventional fund managers can’t even consistently beat the market, despite their years of training and experience. As evidence, only 18% of US-domiciled equity funds and 15% of bond funds have survived and outperformed their benchmarks over the past 20 years.*

If the so-called experts can’t even consistently beat the market, how should wealth-builders steward their growing investment portfolios? Let’s focus on cultivating a sound investment approach based on the evidence of what really works. 

2. LET THE MARKETS WORK FOR YOU.

Conventional investing wisdom tells us that we should try to outguess the stock market, and that’s putting a lot of pressure on us to somehow find the time to figure out a proper investing strategy amidst the demands of a busy career and home life.

The good news is that the history and evidence behind how markets work tells a compelling story. Financial markets have rewarded long-term investors, providing growth of wealth that more than offsets inflation and showing us that we can expect a positive return on the money we continue to invest and supply today. 

Think of the market as a very large information-processing machine. Millions of buyers and sellers like you or me voluntarily agree to trade shares of companies all over the world. Every year millions of trades take place each day totaling billions of dollars.

Now, given that type of volume, do you think public markets quickly incorporate new information and are likely to be a fair representation of intrinsic value? 

Consider if an astute art appraiser went to a garage sale and saw a Van Gogh for $75. She will quickly buy the painting and reap a huge reward. But what if there was just one more savvy art appraiser at that garage sale? The price of the Van Gogh would quickly go up to its fair value.

The collective knowledge of all market participants is powerful and represents the idea that together we know more than we do alone. No one can really know if a company’s stock price is “right” but thanks to the market's processing power we can treat the current price as the best estimate of its actual value. 

If you don’t believe that market prices are good estimates—if you think that the market has it wrong—you are pitting your hunches against the collective knowledge of all market participants.

Trying to anticipate the movement of financial markets adds anxiety and unnecessary risk, and means you’re competing against the collective knowledge of millions of market participants. Instead, harness the power of the entire stock market when investing for your future.

3. PRACTICE SMART DIVERSIFICATION.  

Even if you don’t mess around trying to pick stocks or time the market within your investment portfolio, there is still risk and uncertainty to manage. This is where the importance of smart diversification, a technique used to reduce risk, comes into play.

Diversification is just a fancy way of saying “Don’t put all your eggs in one basket.” I typically see investors concentrating their investments in their home stock market - think the S&P 500 Index here in the United States which represents the 500 largest companies in the US stock market (i.e. Apple, Microsoft, and Amazon).**

Compare the S&P 500 Index (1 country, 500 companies) to the MSCI All Country World Index (48 countries, 9197 companies) and you’ll quickly see how global diversification can broaden your investment universe.**

History shows us that we never really know which market segment or country will outperform from year to year. By holding a globally diversified portfolio with exposure to the US and Non-US countries and thousands of individual companies you are setting the odds more in your favor to capture positive returns wherever they show up. 

This approach also brings balance to segments of your portfolio that don’t have great performance at any given time. We can’t eliminate risk completely, but by spreading your money across so many different companies, usually through low-cost mutual funds or exchange-traded funds, you can reduce the volatility (i.e. short-term ups and downs) of your portfolio.

4. LOOK BEYOND THE HEADLINES TO HELP MANAGE YOUR EMOTIONS.

The instant gratification and constant exposure of social media these days mean that we are bombarded by dramatic headlines, including those about the financial markets, all day long. This works against us if we want to be disciplined investors. 

Some messages make us anxious about the future, while others tempt us to chase the latest investment fad. It brings into question the motive of these news sources - remember that they’re incentivized to feed us clickbait and keep us watching their on-air segments. The CNBC talking heads don’t know anything about your individual circumstances or what your personal investment plan should look like to help you meet your short-, mid- and long-term goals. 

The cycles of fear and greed can drive us to make reactive decisions. Many investors end up locking in their losses in a downturn by selling out of everything and going to cash, only to watch the markets climb again from there and leave them wondering what to do next.

I’m reminded of a timeless quote from the late Jack Bogle, the founder, and chief executive of The Vanguard Group, a company known for creating broad access to low-cost index funds for investors. He offered a warning about trading too much when markets go haywire in the short term and our emotions get the better of us: “Don’t do something, just stand there!”

5. FOCUS ON WHAT YOU CAN CONTROL.  

Evidence shows it’s tough to pick stocks and time the market. Instead, you’re better off relying on the power of global financial markets and building well-diversified portfolios that are tax-efficient, control costs, and have low turnover.

Regardless of these principles, it’s still really tough to make objective decisions about your own money, especially when it’s threatened by various market conditions. Partnering with a holistic financial advisor who integrates planning and investment management is one way to stick with a strategy in good times and bad.

Investing is key to wealth creation, and expert guidance and management that comes from working directly with a financial planner can lead to better long-term outcomes. I work with clients to create and implement an investment plan to align with their overall needs and help them stay disciplined through market dips and swings.

It’s my job to help determine if it makes sense to make adjustments along the way, such as rebalancing or tax-loss harvesting. There are things that matter and things we can control - as a financial advisor I direct clients’ focus toward the overlap between the two with the goal of providing them with a better investment experience in the long run. 

If you’d like customized help using your financial resources effectively in order to make the most out of your wealth-building years, please schedule a free consultation here or email me with questions kelly@kkfp.co

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*The sample includes funds at the beginning of the 20-year period ending December 31, 2021. Each fund is evaluated relative to its primary prospectus benchmark. Survivors are funds that had returns for every month in the sample period. Winners are funds that survived and outperformed their benchmark over the period. Where the full series of primary prospectus benchmark returns is unavailable, non-Dimensional funds are instead evaluated relative to their Morningstar category index. Data Sample: The sample includes US-domiciled, USD-denominated open-end and exchange-traded funds (ETFs) in the following Morningstar categories. Non-Dimensional fund data provided by Morningstar. Dimensional fund data is provided by the fund accountant. Dimensional funds or subadvised funds whose access is or previously was limited to certain investors are excluded. Index funds, load-waived funds, and funds of funds are excluded from the industry sample. Morningstar Categories (Equity): Equity fund sample includes the following Morningstar historical categories: Diversified Emerging Markets, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, Foreign Small/Mid Value, Global Real Estate, Japan Stock, Large Blend, Large Growth, Large Value, Mid-Cap Blend, Mid-Cap Growth, Mid-Cap Value, Miscellaneous Region, Pacific/Asia ex-Japan Stock, Real Estate, Small Blend, Small Growth, Small Value, World Large-Stock Blend, World Large-Stock Growth, World Large-Stock Value, and World Small/Mid Stock. Morningstar Categories (Fixed Income): Fixed income fund sample includes the following Morningstar historical categories: Corporate Bond, High Yield Bond, Inflation-Protected Bond, Intermediate Core Bond, Intermediate Core-Plus Bond, Intermediate Government, Long Government, Muni California Intermediate, Muni California Long, Muni Massachusetts, Muni Minnesota, Muni National Intermediate, Muni National Long, Muni National Short, Muni New Jersey, Muni New York Intermediate, Muni New York Long, Muni Ohio, Muni Pennsylvania, Muni Single State Intermediate, Muni Single State Long, Muni Single State Short, Muni Target Maturity, Short Government, Short-Term Bond, Ultrashort Bond, World Bond, and World Bond-USD Hedged. Index Data Sources: Index data provided by Bloomberg, MSCI, Russell, FTSE Fixed Income LLC, and S&P Dow Jones Indices LLC. Bloomberg data provided by Bloomberg. MSCI data © MSCI 2022, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. FTSE fixed income indices © 2022 FTSE Fixed Income LLC. All rights reserved. S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. US-domiciled mutual funds and US-domiciled ETFs are not generally available for distribution outside the US. There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. 

**Number of holdings and countries for the S&P 500 Index and MSCI ACWI IMI (All Country World IMI Index) as of December 31, 2021. S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. MSCI data © MSCI 2022, all rights reserved. International investing involves special risks, such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss.

Disclaimer: This blog post is not intended to be a substitute for specific financial, tax or legal advice. The article is for general informational purposes only. Reproduction of this material is not permitted without written permission.