Five tips for keeping a cool head when the stock market becomes turbulent

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Over 150 years ago, the French trader Jules Regnault compared the stock market with a drunk man: he'll end up at his destination, but you never know what the next step will be. How can you keep a cool head when the markets become more volatile and share prices start to go up and down sharply?

1. Remember: peaks and troughs are part of the market – there's no getting around them

While major fluctuations and sharp declines in price might give rise to anxiety, they are an intrinsic aspect of trading stocks. Goldman Sachs calculated that the S&P 500 (and the predecessors of this share index) has been in a bear market more than 25 times in the past 185 years. This when prices have fallen by 20% compared to the most recent peak.

In the past, it's sometimes taken several months to recover that loss (as was the case in 1990 and 2020). On other occasions, it's taken several years (as was the case after 1929 and 2008). The important thing to remember is that there has always been a recovery, and the stock markets have grown again.

Although price falls and fluctuations are part of investing in the short term, it's important to always look ahead: in the long term, investing offers a higher potential return than saving money. If you invest with a horizon of 10 or 20 years, high volatility (the extent to which prices move up and down) shouldn't be relevant.

2. Get a good night's sleep: make sure you have the right mix of investments

Fluctuations are par for the course: we're generally aware of this when we start investing. Once prices really start to fluctuate, though, there are always investors who panic sell when they see a sharp fall. That's why you should put together an investment portfolio that gives you long-term peace of mind, even if the markets change unexpectedly.

  • If you know your blood pressure is going to go up with mood swings on the markets, opt for a conservative portfolio (e.g. 80% bonds and 20% shares). Go for a dynamic portfolio (e.g. 80% shares and 20% bonds) if you're cold-blooded enough to handle your portfolio temporarily spending a quarter in the red. Choose a balanced portfolio (e.g. 50% shares and 50% bonds) if you're somewhere in between.
  • Ensure adequate diversification by investing in various shares, bonds, trackers and/or funds. This is also a way of smoothing out fluctuations during periods of higher volatility.
  • During volatile periods, investors sometimes reduce their riskier equity positions in favour of more defensive sectors. Although these sectors aren't immune to movements in the market, they can help to limit fluctuations. Opting for dividend shares can also be a way to absorb the impact of price fluctuations. Of course, you don't have to wait until volatility gives you an excuse to switch things up – you can also proactively opt for defensive or dividend shares.
  • If you're an active trader, you can choose to hedge certain positions with a put option. If the price of a share or index falls, the price of the put option rises and you can offset the loss on the share or index (whether in full or in part). The reverse applies, too: if the price of a share or index rises, the price of the put option falls. This is comparable to a kind of insurance premium you pay to protect your portfolio.

3. Focus on time in the market – not on the timing of the market

It can be tempting to sell positions to prevent (further) falls. However, it's difficult to get the time to leave right. Choosing the right time to (re)invest is also tough, as you run the risk of being wrong twice.

If you sell and are still sitting on the fence when the market recovers, you may not make up what you lost. It's worth remembering that the worst-performing days on the stock market are often close to the best-performing days. Missing even a few of the best days on the market can seriously affect your returns.

The Bank of America calculated that if you missed the top 10 days of the S&P 500 every decade between 1930 and 2020, your total return after 90 years would be 28%. If, however, you ignored the ups and downs and simply held on to your investments, the return would be 17,715%.

4. Invest consistently, even in bad times

The best opportunities to buy often arise when investors throw in the towel on a huge scale. By consistently investing €200 every month, for example, you're investing not only when the stock market is doing well, but also when things are less rosy.

Investing some of your money at regular intervals can also be a way to counteract the fluctuations in your portfolio. With a regular investment plan such as KEYPLAN, you can apply this technique from as little as €25 per year.

5. Have someone manage your investments

We're sometimes dragged down by market sentiment, like when everyone seems to be heading for the exit. The same logic applies in cases where everyone seems to be investing in the next big thing on the stock market – recent examples include the stampede for hydrogen and Reddit shares. This sometimes leads to impulsive selling or buying. After a while, there's no longer a clear strategy involved.

If you're often swayed by such developments, it may be a good idea to have your portfolio managed instead of actively investing yourself. A team of investment specialists will construct a portfolio based on your investment horizon and risk appetite, without being influenced by the sentiment of the day. At Keytrade Bank, you can opt for asset management starting at €15,000, based on a Nobel award-winning investment strategy. vermogensbeheer vanaf 15.000 euro, gebaseerd op een Nobelprijswinnende investeringsstrategie.

This article does not contain any investment advice or recommendation, nor a financial analysis. Nothing in this article may be construed as information with a contractual value of any sort whatsoever. This article is intended for information only and does not constitute in any way a commercialization of financial products. Keytrade Bank cannot be held liable for any decision made based on the information contained in this article, nor for its use by third parties. Every investment entails risks such as a possible loss of capital. Before investing in financial instruments, please inform yourself properly and read carefully the document "Overview of the principal characteristics and risks of financial instruments" that you can find in the Document centre.

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