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A flight I was on had horrible turbulence last week.
We were flying to Dallas during a thunderstorm. My fiance is a nervous flyer, so she would look at me wide-eyed every time our plane jostled in the sky.
While I kept my cool on the outside, inside my cortisol levels were spiking.
Yet not everyone shared our turmoil. For instance, the woman across the aisle slept soundly through the entire ordeal, completely undisturbed by the chaos around her.
Now, you might be wondering what turbulent flights have to do with investing.
But stick with me, as there’s a strong connection between my turbulence story and how you should approach investing.
You Should Expect Market Turbulence
Every investor should strive to be like the sleeping woman.
Because if you’re investing in stocks and crypto, volatility is the price of admission.
Just like unexpected turbulence can unsettle even the most seasoned flyers, the stock market's inherent volatility can test the mettle of investors.
Historical data from the S&P 500 underscores this point vividly. Data from Yardeni Research shows the S&P 500 experiences a 5% pullback, on average, three to four times a year. More substantial declines of 10% or more, often referred to as corrections, occur roughly once every 16 months.
Even more dramatic downturns of 20% or more, which mark the onset of a bear market, have unfolded about every 3.6 years since World War II.
This historical perspective serves as a crucial reminder that market dips are not anomalies but a normal part of the investing landscape. Much like those brief moments of panic during flight turbulence, market pullbacks can evoke fear. However, just as the plane continues on its path, history shows us that markets have a tendency to recover and reach new heights over time.
And this “turbulence” is even more pronounced in the crypto market.
Crypto is Volatility on Steroids
If the stock market volatility is turbulence, crypto market volatility is a near-death experience.
For instance, let’s take a look at historical volatility for the grandaddy of them all: Bitcoin. This pioneering cryptocurrency is renowned for its dramatic fluctuations.
According to a study by Coin Metrics, Bitcoin has experienced drawdowns of over 20% nearly every year since its inception. More extreme dips, including those of 50% or more, are not uncommon and have occurred multiple times throughout its history, most notably in 2011, 2014, 2018, and again in 2021.
And for altcoins - or cryptocurrencies other than Bitcoin - volatility is even more pronounced as 8% daily swings are the rule rather than the exception:
Such significant pullbacks highlight the volatile nature of digital assets.
However, whether you’re investing in the S&P 500 or Bitcoin - two of my largest personal portfolio positions - it’s important to remember that volatility is temporary.
The Destination is Always the Same
Both the S&P 500 and Bitcoin have shown a remarkable ability to rebound from these lows.
In fact, despite massive pullbacks, corrections, and crashes, both the S&P 500 and Bitcoin have always bounced back to make new all-time highs.
This brings us back to the story of me and the sleeping woman. I was awake the entire flight and living in a constant state of fear. On the other hand, the woman next to me missed the entire ordeal.
Yet in the end, we all ended up in the same place. And the same thing applies to investing.
You can constantly fret over every pullback, correction, or crash. Yet if you own high-quality stocks and crypto - like S&P 500 ETFs and Bitcoin - you are going to get the same results as someone who never checks their portfolio.
Plus, you’ll also avoid the emotional decision making that comes with constantly checking your stock and crypto portfolio.
Don’t Succumb to “Loss Aversion”
Investors glued to their portfolio's every dip and rise are more prone to making impulsive decisions driven by emotion rather than strategy.
A study by the National Bureau of Economic Research found that investors who frequently check their portfolios are more likely to trade excessively and, in turn, underperform.
This behavior, known as "loss aversion," causes investors to react adversely to short-term losses, leading to potentially detrimental portfolio adjustments.
Further research from a behavioral finance perspective supports this, suggesting that constant monitoring amplifies emotional responses to market volatility, prompting actions that can derail long-term investment goals.
The psychology behind this phenomenon is simple: frequent exposure to market fluctuations can heighten anxiety and lead to a focus on avoiding losses rather than achieving gains, underscoring the importance of a set-and-forget strategy for most investors.
Keep Your Eyes on the Prize
Much like passengers on a plane, our experiences—and our reactions to those experiences—can vary widely based on our awareness and our mindset.
For investors, the woman sleeping soundly through the flight's turbulence serves as an apt metaphor for the power of detachment from short-term market fluctuations. She reached her destination just as those awake and anxious did, but without the stress and fear.
In investing, maintaining a long-term perspective, akin to sleeping through the turbulence, allows us to weather market volatility with a sense of calm and confidence. It's about trusting the process, understanding that while the markets may take us on a bumpy ride, history has shown that they move upward over time.
By focusing on our final destination and not getting caught up in the moment-to-moment turbulence, we position ourselves not just to survive the market's ups and downs, but to thrive through them.
So, the next time the market takes a dive, remember it's just a bit of turbulence. Strap in, trust your strategy, and maybe, just like that passenger, try to catch some Z's—you're on your way to your destination, after all.
Stay safe out there,
Robert