In the 1960s, sociology professor James Henslin spent time with a group of cab drivers in St. Louis to understand their gambling habits. When the drivers finished their shifts for the night they would play craps into the wee hours of
the morning, typically from 3 am to 7 am. Henslin sat in on nearly 20 of the dice games to determine how the drivers’ thoughts and actions dictated how they played.
In his paper Craps and Magic, Henslin writes about how he discovered many of the players were operating under a sense of magic over the dice:
It became evident to me that these players were convinced that they could control the dice, that is, as shown by their behavior (by their statements, gestures, and betting practices), they were not playing solely under the assumption of probability or odds, but, rather, they also moved within the framework of a system of magical beliefs.
The players would routinely throw the dice harder when they wanted a high number and throw it softer when they wanted a low number. This is also why you so often see players blow on the dice before a throw at the casino. These practices have no bearing on the outcome but they give the gamblers an illusion of control.
When stock market volatility erupts, investors are always in search of their own illusion of control. We crave predictability and control when it comes to our money but the stock market provides neither.
When stocks are rising, investing is often boring, methodical and the opposite of newsworthy. When stocks are falling, investing is often exciting fast, and scary.
Investors often look to find some modicum of control through the answers of gurus. We just want someone to tell us what’s going to happen next so we can either buy or sell to relieve the fear and anxiety.
In all my years of doing this, I’ve never come across a single person who has all of the answers. That person doesn’t exist.
When stocks go down in a big way I find it’s more helpful to seek out the right questions as opposed to trying to find all of the answers.
Here are some questions you can ask yourself when trying to work through how to handle stock market volatility:
If I sell my stocks now what is the plan for getting back in?
Has my time horizon, risk profile or circumstances meaningfully changed enough to warrant a portfolio change?
Will my lifestyle be impacted in a meaningful way if stocks continue to fall?
Did I build my portfolio with the understanding that stocks can and will fall on occasion?
Have I overestimated my appetite for risk assets?
Do I need to use the money I have invested in stocks for spending purposes in the next 3-5 years?
Does my portfolio match my willingness, need, and ability to take risk?
Do I fully understand the potential range of outcomes when investing in stocks?
Is my portfolio durable and diversified enough to withstand severe dislocations in the stock market?
Does my investment strategy fit with my personality?
How did I react to market carnage in the past?
How much volatility am I willing to accept in order to earn higher expected returns over time?
What are my core investment beliefs?
What do I own and why do I own it?
What will cause me to buy or sell securities, funds, or asset classes in my portfolio?
There are no right or wrong answers here because it all depends on your
These questions work in every market environment but more so when volatility rears its ugly head because that’s when we want to take the wheel to make something happen to give us the illusion of control. Most of this stuff boils down to having a comprehensive investment plan in place to guide your actions and set realistic expectations.
But the act of creating an investment plan is the easy part. The hard part is implementing that plan during periods of heightened stress in the financial markets or your own personal life.
Even the most rock-solid of investment plans won’t give you the same illusion of control as your favorite talking head who pretends to know what’s going to happen next in the stock market.
What happens next in the market is completely out of our hands which is why the most important reason for creating an investment plan is that it forces you to focus on what you can control.