Investors hate volatility. They fear declines in the value of their stocks. There is nothing wrong with feeling that way. In fact, it’s perfectly normal. When we see account balances decline, we want it to stop immediately. Our emotions begin telling us to sell everything and just maintain cash, even though we know that it’s not in our best long-term interest.

So how do we overcome volatility?

Well, we don’t. You may not like that answer, but volatility is a very natural component of investing in stocks. Embracing volatility and understanding that there is nothing inherently wrong with it can go a long way towards ensuring your future financial success.

You can ignore volatility, you can tell yourself “stocks will recover as they always have”, or you can engage in any other coping mechanism that helps comfort you. Unfortunately, dealing with volatility can be extremely difficult, if not near impossible, for many people. This is where maintaining a strategy comes into play. We must be able to distinguish between making emotional decisions and making decisions based on our investment strategy. Just because stocks go down, doesn’t mean that the strategy isn’t working and should be abandoned. Remember, volatility is normal and expected.

Sticking with an investment strategy in both good times and bad is one of the simplest, yet most important investment strategies. Selling out of the stock market during a decline is generally a bad idea, especially when it is done out of fear. Emotions can wreak havoc on our investments and lead to very poor decision making. Another important aspect to focus on is your contribution rate. Maintaining a consistent frequency of new contributions into your investment accounts will have a significant impact on your long-term results.

Loss aversion can help explain our hatred towards a declining stock market. The basis of loss aversion states that losses elicit a higher degree of unfavorable emotions, which are twice as strong as the positive emotions we feel from a gain of equal proportions. Essentially, if stocks decline by 10%, we feel twice as bad when compared to the positive feelings we receive when stocks increase by 10%.

When stocks decline, we expect them to recover. You may be saying, “What if history doesn’t repeat itself and stocks don’t recover this time?” Think of it this way, if the stock market crashes and does not come back, then you have much more to worry about than your investments. In order for our entire economic system to survive, companies need to continue growing and making money.

So when volatility occurs, what will we do? Let it happen. Don’t throw your strategy out the window only because of recent events. Embracing volatility may not be a fun solution, but it is the best approach to maintaining long-term success.

Disclaimer: Advisory services are offered through Rivetti Investment Services, LLC, a Registered Investment Adviser.

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