Ask Joanna: Should I Stop Investing When The Market Gets Volatile?
Q: The stock market has been very volatile right now. Should I stop investing or hang on to my extra cash until the market recovers?
A: In terms of investing excess cash, it can be very tempting to wait until the market feels “safe”. However, the best investment opportunities are actually when the market feels the scariest. When the market has dropped, that means prices have gone down. When the market is up, prices have risen. We want to buy low and sell high, NOT buy high and sell low. That means we have to act in ways that feel contrary to what our emotional brain is telling us to do. Regularly investing is much more likely to help you achieve that goal of buying low and selling high because it takes the emotion out of the decision.
This concept is also based on the assumption that the companies we invest in are still solid companies. They are making products and services people want to buy. Every business goes through up-and-down cycles. Further, stock market pricing is often divorced from the reality of business operations. This is because daily prices are driven by what people think will happen and emotional biases. We know people are terrible at predicting the future and make emotionally driven (not logically driven) and short-term-focused economic decisions.
I know this can be a hard decision to make when you’re hearing scary stories in the media and from friends and co-workers. The media’s job is to sell advertising, which they do through creating sensational content. Fear sells a lot of ads! And the people around us are often reacting to those messages or acting out of emotional and mental biases. Your job is to ignore all that and stick to your plan!