Conquering Volatility, Grandpa Dex Style

As I’m sure is true of many folks, my grandfather (Grandpa Dex) was bigger than life to me as a kid—standing at around 6’6” he was the tallest person in my family, and he worked for NASA throughout the space program’s early years. He was particularly fond of nicknames and one-liners rolled out in a loud Texan voice. Grandpa Dex and I never spoke about investments (he passed before I graduated college). But he had a way of saying a lot in few words, and one adage has stuck with me as particularly wise in investing: “Desperate people do desperate things.”

How does that translate to investing? Few investors enjoy sharply negative markets, and the fear investors feel is certainly understandable. At times like the present, wildly swinging markets tend to trigger the innate human instinct of “fight or flight”—the sense doing something is requisite. And generally, that sense pushes one to feel action is needed to mitigate the gyrations.

But attempting to dance around fast-moving markets in an effort to catch the upside and miss the down can be a fundamental error. There is no one—no one—I can find with a proven, published and time-tested track record of successfully navigating markets’ day-by-day movements consistently. In markets, responding purely to volatility can be folly, an inherently backward-looking decision about something non-serially correlated (meaning, stocks’ movement tomorrow is not influenced by fluctuations in the last 10 minutes, 10 hours or 10 days).

Consider an example from a much bigger and far more fundamentally scary time: the days around March 9, 2009. If you were an optimist then, kudos to you. But an honest and self-aware member of the vast majority would admit they weren’t. No doubt some felt the need to take some form of action during those volatile days—to “stop the bleeding” maybe. But ultimately, taking action on such feelings would have led to missing part—or all—of the thunderous charge higher as the current bull market began. There are others who held on, perhaps not optimistically, but who (maybe with others’ counsel) refuted the psychological “sell” urge—a solid, disciplined decision that has since paid off. Now, there’s little comparison fundamentally between then and now, but there’s a critical lesson for investors here: Even at the most extreme points, staying cool and taking a rational, forward-looking view of markets is imperative. Maybe markets move higher, maybe they don’t. But reacting purely to price movement rarely works out longer term.

Fact is, there was not in 2009—and will never be—an all clear signal shouting “Negative volatility is over!” The most powerful force in investing is compound growth, and if you miss a portion of return at some point over the long term, even just 10%-15%, you’ve actually missed a lot more through the course of your investing life.

As my boss Ken Fisher wrote in his book, The Only Three Questions That Count¸ there are times to get defensive, but those times are when you can identify a probable, big, negative force others don’t see—a factor giving you an edge over the millions of other investors. The goal here: Capture an opportunity others are overlooking to add to relative performance by selling at a higher point and buying back in later and lower. You cannot do this by responding to volatility so widely known the local news is discussing it before the weather. And you cannot do it without a re-entry plan. Maybe you’d get lucky once, but it isn’t a strategy likely to succeed over the long term.

Ultimately, investors who seek or need equity-like growth for some or all of their portfolios should understand this comes with occasional negativity and volatility. But stocks’ long-term return has historically compensated investors well for this lack of comfort—even including bear markets and corrections that can be very emotionally trying along the way. As an investor, you do not need to avoid all volatility to be successful. What you do need to avoid is falling into the trap of responding to volatility with emotion when it happens.

The media isn’t going to be your friend in this mission. After all, there’s a profit incentive—the media wants you tuned in through commercials. But ultimately, the goals for your investments are factually oriented (retirement, etc.). Here’s a strategy, inspired by Grandpa Dex, intended to help navigate negativity:

• When stocks fall sharply and your gut kicks in, don’t immediately jump online or get on the phone. Turn off the news. Stop. Take a deep breath. Do something not related to investing. Essentially, disconnect to lower your blood pressure.
• Put market movement in its proper context. If you’re in relatively good health and have a reasonably long life expectancy, you should be planning for decades ahead—not minutes, hours, days or weeks.
• Ask yourself the question: Am I seeing the full picture of market and economic conditions? Balance the fear and be a skeptical consumer of media.
• Seek out opinions of others—especially those who might disagree with what your gut says. This is all targeted at avoiding confirmation bias. The last thing you need is a “yes man” when you’re in a heightened emotional state.

Perhaps most important: Consider major asset allocation shifts very coolly and rationally. Nobel-prize winning studies have shown asset allocation is the most important decision you make in investing—meaning it has to be made with a clear mind, not one encumbered by emotion.

The fundamental point of my grandpa’s saying is it’s nearly impossible to make educated, rational decisions when your emotions are elevated. Markets and economies are all about decisions and reasons. The likelihood an individual can properly assess those factors while dealing with adrenaline and fear is extraordinarily low. And in markets, emotional decisions often translate into fewer dollars to live on in the long run.