Dealing with the Emotions of a Volatile Stock Market

Recent volatility in the stock market has people reassessing their appetite for risk. Investing in a bull market is easy as it seems the only way equities go is up.

The recent bull market has an added way of lulling people into a false sense of security. Last year many indexes never saw even a 5% pullback even once. Some didn’t see a 3% decline at any point! This is a highly unusual situation confirming for some people the stock market doesn’t test your resolve as often as it does.

In the past week we’ve had a > 5% intraday swing in the market indexes. Many individual stocks had even greater moves!

The first shock wave most investors put on a brave face. The constant chatter on social media meant it was all an act. The market caught people’s attention.

The broad market didn’t even close down 10%, a level considered a normal and expected pullback in the broad market, before the clichés were pulled out.

I didn’t Lose Money Because I Didn’t Sell

This is the stupidest thing I hear every time the market pulls back or a correction is discussed. If you don’t sell you don’t have a taxable event, but your net worth has declined!

If you believe stupid clichés to keep you from making bad investment decisions you might want to consider money market accounts before you experience a bloodletting.

There are people who refused to sell Enron. They NEVER actually sold Enron. Does that mean they never lost money? Heck, no! The Enron Scandal destroyed many life savings. Not selling didn’t make it better!

Granted, index funds are different from an individual stock, especially Enron. But the lesson is learned. Whether you sell or not doesn’t change the fact your investments declined at least temporarily.

The worst part about these old worn out clichés is that it focuses your attention on the wrong details.  Refusing to sell because you know it’s the wrong thig to do in a down market is radically different from thinking about what you SHOULD do!

I agree, panic selling is a bad idea. But BSing yourself into thinking you haven’t lost money when your portfolio dropped $87,000 is industrial strength stupid.

Another line of reasoning has people backtrack to the last time the market traded at the lower level and then saying if they hadn’t checked their account since then they wouldn’t even know the market went through a conniption fit. But you do know and your brain is in overdrive trying to preserve the previous old highs!

A Better Way

There is a better way to look at the stock market when it declines. Instead of focusing on denial (refusing to sell in a down market only to succumb when it gets super bad at the ultimate low) focus on value.

The underlying value of the businesses you own a fractional share of (that is what stock ownership really is if you didn’t know) probably didn’t change much in value since traders blew out their backside timing the market.

Once a decline begins a lot of selling is forced by margin calls! Sanity or reality has nothing to do with it. Leverage increases risk magnitudes of order. When you borrow to invest it’s not if, it’s when the boom will be lowered. Pray to every god ever known you don’t get lucky the first time using debt. Debt also magnifies gains. If you win the first round you are either addicted or lulled into digging in deeper next time. Either way the carnage will also be increased.

I hate it when people say they refuse to sell into a down market. Has anyone considered putting new money to work during a decline? Just asking.

There are tricks, games you can play, to reduce the sting your psyche experiences, especially when you are starting out. We’ll go there next before we discuss good reasons to sell.

Let’s Play a Game

My 18th birthday came less than month after I graduated high school and I couldn’t wait. I had a veeeery modest nest egg in a passbook savings account (remember those) at the bank. Shortly after I reached the age of majority I pulled most of the money out and dropped it into growth & income funds.

I timed my age perfectly. In August 1982 the market took off like a streak and never looked back. Until 1987.

Even in an advancing market there are down days. As the 80s bull market got longer in the tooth volatility increased. Record highs meant larger point losses if not actual percentage records.

Not immune to the emotions of market moves I knew I had to find a way to short circuit my brain to avoid the fear and pitfalls of down days.

I devised a game from watching my account grow. A down month was never as bad as the overall market because automatic deposits muted the losses. Up months really looked good! Using an old spreadsheet (I think actually used Excel 1.0 at one time (gawd, I’m old)) my account values took on a stair step pattern as each new investment jumped the account value and dividends kept ratcheting higher.

My game only works with small accounts, but it sure helped me when I was building my first million. What I did was this. When the market declined I would do everything in my power to increase new investments so the actual value of the account didn’t decline.

An example would be if I had an account value of $100,000 and the market pulled back 3% I would try to add at least $3,000 of new money during the month. I worked hard to always keep my account value at the old high water mark.

Big declines are hard to offset and as the account grows larger even small declines became hard to offset.

The game was still the same. I might not offset the whole market decline, but I sure put a dent in it.

Then 1987 showed up.

Market volatility increased as the bull market aged. I wasn’t a millionaire at the time, but my accounts worked deep enough into the six figures to make constant investments as the market declined from a top in August to the gut-wrenching losses of October more and more difficult.

I’d be lying to you if I said I controlled my emotions during the market turmoil of 1987. My guts were a disaster. The only good news I can report is that I was so scared $hitless I never sold. I was numb all over. At least I did my job keeping the economy afloat with regular purchases of Fruit of Loom.

What I didn’t understand as a young adult was that my game actually prepared me to think about market prices differently.

Market declines were not about willpower NOT to sell, but rather an opportunity to reassess value.

In down markets there will be companies on sale. Not all of them, but a few.

All those mutual fund/index fund investments also go just a smidge further in a down market, too, buying more shares with each dollar invested. The other game I played was to track the number of shares owned. Philip Morris might be down, but I still own my pro-rata share of the company. That part is mine. My part of the revenue; my part of the assets; my part of the profits; my part of the dividends.

Strangely, the dividend stream never dipped much so I changed my game as the account values increases to add new money to maintain the income stream only.

Isn’t money a fun game?

Market Timing

Smart people will tell you to never try timing the market. I think I’m a relatively smart guy! It could be delusion, but it’s my fantasy so I’m sticking with it.

In late January I mentioned on social media (Facebook) that I moved to my highest cash position in my adult life. I was promptly jumped for market timing. A few days later we had the current market pullback.

So what gives, Sir Accountant?

Well, in my defense, I wasn’t timing the market. My gains over the last decade have been nothing short of astounding. Second, when I calculated the discounted future value of earnings with higher interest rates due to the tax law changes the numbers no longer added up.

I had no idea my selling would be so well timed. But . . .

My timing wasn’t timing! And even if I was so lucky to time the market so right I still need to pick the right time to jump back in!

For the record, I didn’t sell with the intention of buying back at a lower price.

I sold because the value of future earnings were not high enough to keep eight figures and over 80% of my net worth in index funds and individual stocks.

Since the market DID decline I might return some of the money from where it came. A 5% decline isn’t enough to change my mind. Now if we see blood flowing in the streets I might bite. It’ll take at least a 20% decline to accomplish that. I’m not holding my breath.

I hope this ends all discussion of my mighty stocks timing skills which I don’t possess.

What to do and Where To

So what should you do in volatile markets?

First, DON’T PANIC!!!

The broad markets have always come back and always will. If I’m wrong there will not be earth to live on so it will not matter. You’ll have to sue me after the collapse of civilization if I’m wrong.

If you are a millennial and your account is small enough, try playing my game. Cut every possible expense and add to your regular investments until your account value has little or no change.

If your account is getting bigger play the first game with an eye toward keeping the dividend stream pointing north. This is easy so far as dividends are rising nicely as I write.

I sometimes tell people not to look at their investments when the market falls, but I am assuming there are no adults in the room. I recommend you know exactly where you stand so you can make intelligent decisions like adding extra to the pile while stocks are on sale. And it’s okay to have cash available for just such an event. Some crazy accountant from Nowhere, Wisconsin told me that.

The best way I know to visualize your holdings is with Personal Capital. The best part is there is no cost to open an account and kick the tires. Seeing your investments performance live can provide additional encouragement to play the games I outlined above.

Negative attitudes about declines are caustic! Willpower alone will not help you sleep at night and may actually get you to wait for further declines before selling! Playing a game with your mind to recognize value is a powerful tool.

The last thing I want to touch on is what I plan on doing with the cash balance I built in January.

There are alternative investments available for those in the know. One investment I’m testing is PeerStreet.

PeerStreet works a lot like Lending Club and Prosper but with what I consider less risk since you invest in real estate loans with at least 25% equity whereas Lending Club and Prosper are unsecured loans. Returns are comparable and if recent personal results are any indicator, PeerStreet does better.

This is only one alternative investment I’m considering. With the better part of eight figures in cash I’ll need a few more ideas. I’ll share them when I know more.

I’ll be publishing a PeerStreet review, but there are compliance issues. PeerStreet is only for accredited investors (PeerStreet has the details on their site if you follow the link above). Once PeerStreet’s compliance department grants permission I’ll share my review..


So there you have it. How to control your emotions when the world turns into a raving mad mob of Chicken Littles.

Anyone up for a friendly game?

Keith Taxguy


  1. Jeff @ Maximum Cents on February 7, 2018 at 7:52 am

    I like your advice of adding to your account on days when the market is down big. I have been doing this for over a decade and have eventually seen some big gains once the market recovers. It’s important to take a long term perspective and not get too focused on daily swings.

    • Keith Schroeder on February 7, 2018 at 8:32 am

      Turn investing into a game, Jeff, and all the emotions bleed away and your returns improve immensely.

  2. Andy on February 7, 2018 at 8:11 am


    I received this awhile ago from a fellow investor. I keep this handy as a reminder:

    “A couple of thoughts.
    I have an old newspaper clip I saved 30 years ago. It has turned yellow with age.
    It pretty much states once you understand the concept of compounding,reinvesting and time,then you “got it”.
    Share acquisitions is the key. Down markets are just a wonderful opportunity for long term investors.You truly have to focus on that and not waste energy on “Oh how much money I have lost”.
    For me each share in a mutual fund is like an employee that never sleeps.
    I sleep while the army of employees are working for me (Coca Cola, Mcdonald’s cash registers are ringing 24/7)the more shares the more income producing employees.
    It is about the economy,not all the noise.
    Been doing this since 1980 at Dow 850 and bought steadily and still reinvesting to this day.
    It is exactly like running a business.One of my family members said the same to me,that managing my financial life to where it has positioned me today has been like a career that I have enjoyed. Just keep investing if you have decades ahead of you.”

    • Keith Schroeder on February 7, 2018 at 8:36 am

      My time frame is similar to yours, Andy. I’ll add I’ve been crazy for a long time about investing. Somewhere I have VHS tapes of the Nightly Business Report with Paul Kangas from the day of the 1987 crash. Markets have always fascinated me. How people respond to markets and their significant moves also are educational.

  3. MB on February 7, 2018 at 11:12 am

    Good article. So harsh on my beloved “cliche” Lol.I used just the other day:). I definitely lean towards holding on until all value bleeds out. Which is why I have shifted over to index funds. Which I hope balances out that tendency (has treated me quite well so far in life). Your mention of Enron proves a good point of not living blindly but one could argue that the real flaw in their thinking was that they invested in a single stock in the first place.

    Thank you for the new toolset to apply to downturns.

  4. Randolph Hawkkns on February 7, 2018 at 3:58 pm

    Have you considered fundrise or any of the other real estate crowdfunding sites at all? I know it isn’t restricted to accredited investors and has a different focus (commercial property) than PeerStreet. That said is there something about the offering that at PeerStreet that seems less risky or a better use of your capital?

    • Keith Schroeder on February 7, 2018 at 5:35 pm

      I haven’t tried other RE investing venues, Randolph, so I can’t express an opinion. I like what I see at PeerStreet and my first two loan closed today. Now I’ll wait and see how it feels.

  5. FullTimeFinance on February 7, 2018 at 5:58 pm

    I don’t think I can get on board with shooting down the comments about not looking. The reality is not everyone has the psychological fortitude to ride it out. Vanguard and others data even shows on average those who forget their account do better. Ie I didn’t lose money because I didn’t sell is probably best for the average investor.

    As someone whose further along and more knowledgeable I make adjustments along the lines you mentioned to be able to buy more on true declines (not with dry powder but instead with tighter spending controls during these times) but I recognize I don’t represent the average investor who went to cash in 2008 and may still be there.

    The average investor had no clue how to value the market (we will speak in relatives here as no one agrees how to value the market in the first place except we know events like 2008 represent a buying opportunity for those with fortitude)

    • Keith Schroeder on February 7, 2018 at 7:58 pm

      FTF, as soon as you look psychology takes over. That’s why I suggest turning it into a game so your mind interprets it differently. The same applies with credit cards. Research shows people will spend on average 17% more with a credit card than cash. I don’t know the level of validity to the research, but it make sense to me. A lower account balance will affect everyone in different ways.

      Warren Buffett licks his chops when the market goes on sale. My guess is he plays mind games with himself to view a sale on businesses as an opportunity. It takes a special breed to manage emotions like Buffett. Nobody really believes they didn’t lose if they didn’t sell. If that were true nobody would ever look until the day they needed some of the money since there isn’t any reason to look: if it’s down it didn’t lose and if it’s up you didn’t win. The only value change takes place at sale.

      I disagree with the idea of not being able to value the market. The market consists of businesses. Businesses CAN have a value placed on them. Buffett does a pretty good job of finding value. I’ve listed books in this blog on how to value a company, public or private.

      Up markets are always easy, FTF. That’s why I will have my work cut out for me when the market goes down a real amount. I agree with not selling, especially if in broad-based index funds. I worry about my readers making poor decisions based on emotions in the heat of the moment.

  6. Jason on February 7, 2018 at 7:39 pm

    This may sound dumb but the way I try to control things is by sleeping on the decision, even with large market declines. In 2008 I was scared and I considered selling, but I didn’t . I don’t think it was will power, but there was nowhere to hide. I was more worried about not losing my job, which I didn’t, but that experience taught me that I could withstand some things. While this latest downturn sucked I didn’t even budge. I just refused to look at my Personal Capital account for a few days.

    • Keith Schroeder on February 7, 2018 at 8:00 pm

      All successful investors find ways to manage their emotions, Jason, when the market weather gets rough. I encourage you to use what works for you. BTW, I’ve never seen an investment decision made in the heat of crisis turn out well.

      • Blastmaster on February 7, 2018 at 9:32 pm

        In late 2008, I had been spending some time reading in the rancid, reeking , dark and fetid corners of the internet about the housing bubble, stock market bubble etc. In a case of market timing that actually worked, I panicked and rolled all of my federal TSP stock funds into the ultra safe G fund, missing the crash completely. Unfortunately, Instead of increasing my contribution percentage during this downturn, I reduced it to the minimum required to receive matching funds from my agency. I kept the percentage of income invested at this low level (5%) even after going back to the stock funds in 2010. We bought some new furniture, built a deck, replaced a car and ramped up lifestyle a bit because it seemed like the world was going to hell. I got serious about FI several years ago (saving 50% plus) and now realize what a great buying opportunity those years were for stocks! WHEN the next correction comes, I will repeat that to myself and stay the course even if it takes years. Realizing that I have a comfortable home and zero debt, a great family and a steady income that provides for everything that we need puts me in a position that would be enviable by billions of people. Remembering that while my portfolio may be smaller temporarily, by staying the course I will be buying more shares, resulting in a much larger balance years down the road.

  7. Wealthy Doc on February 8, 2018 at 5:15 am

    Yet another awesome blog post!
    I loved reliving my glory days in the 1980’s playing similar games on Lotus 1-2-3. Man, we were fun in college, eh?
    I agree that when the market dives it isn’t reassuring to hear I haven’t lost anything. The statement of my net worth sure looks like a smaller number.
    Your method of topping off the dollar amount after a decline reminds me of Value Averaging. That has been shown to work better than DCA.
    I pulled back on my equity investments further in January also. I have enough squirreled away that I just don’t need to take risk/volatility to meet any of my goals.
    I loved the games you suggested. Another one: I sometimes just watch the number of shares I own. I can plot it out and follow it. I can even increase that number more when prices decline which makes me smile in down markets.

    • Keith Schroeder on February 8, 2018 at 8:25 am

      Doc, I might have reinvented the wheel without knowing it. I never called it Value Averaging. I never actually gave it a name. All I knew is I hated seeing my account value decline when I was starting out so I found ways to feel better about my account. Lotus 1-2-3. Wow! Those were the days.

  8. Jason W on February 8, 2018 at 9:53 am

    Hey Keith! I’ve been investing in one of PeerStreet’s competitors for a few months and have noticed a continued decline in the number of offerings. Currently, there are all of two first lien debt opportunities open. How’s the availability on PeerStreet? My concern is how much do these platforms stretch to obtain new deals? Of course, they will tout their strict investing discipline, but without deal flow, they’ll likely loosen certain standards..

    • Keith Schroeder on February 8, 2018 at 10:28 am

      Jason, what I’ve seen so far is promising. Every PeerStreet deal has been a first lien. I’m not 100% certain as this stage , but I think they get their deals (or at least some of them) in a similar way to Treasury strips. A strip, for the uninitiated, is where payments along a certain part of a loan are stripped off and resold. For example: interest or principle only portions of the mortgage can be sold separately. With PeerStreet, I think they buy the next several months up to five years of payments of a longer maturity note. As a result they have all first liens. The original lender is still on the hook for the remainder of the loan as I understand it.

      Supply is an issue. They have a hundred or so deals per month. Notes under 8% are easy to get into. You need to set up automatic payments and set the parameters to a higher rate if you want higher rate notes.

      Disclosure: I invested in two notes earlier this week and transferred cash to PeerStreet today for an additional investment as soon as it’s available. I’m also testing how the auto-investments will work.

  9. Nordland on February 8, 2018 at 10:42 pm


    A bit of a personal question with some stock/bond market taste – I’m under the contract to build a new house, but it will be complete in August. By that time the 15-year fixed rate (that’s what I’m looking at mainly) might be over the roof. A few lenders offer extended rate locks and all the conditions are terrible…
    Is there a good way to hedge up against rising interest rates to at least compensate a part of the mortgage increase? The only thing I found so far is the inverse ETFs on 10 and 20-year Treasuries, plus there might be some offering 3x returns (tickers like TMV). Is that a good idea to put some money in there and then withdraw after I lock in the rate say in June? Or what would you do in such situation?


    • Keith Schroeder on February 9, 2018 at 8:04 am

      Ooooo, Nordland, you hit on a touche topic. I’m sure to catch hell no matter what I say.

      Before I begin let me explain that when I moved to 52% cash in January I also bought some TBT. TBT climbs when 20-year Treasuries decline, meaning interest rates increase.

      The idea you propose, Nordland , is sound, but fraught with risk. The fees on some of these exotic ETFs have fees that destroy gains. So when it goes against you you lose and when it moves as you expect you get a limited return. TBT and her sisters perform worse the longer they’re held due to the accumulating transaction and ETF fees.

      Once again, I did it, but don’t recommend it. Following in the footsteps of every Warren Buffett investment is a recipe for underperformance. The same applies following in my footsteps.

      I will probably increase my TBT holdings as I can’t see inflation and interest rates going anywhere but up. If you decide to walk this path using TBT as a hedge, make sure you only hedge enough to cover your personal interest rate risk unless your financial situation permits for some mad money investments. (My TBT ownership is in my mad money account, BTW.)

      Finally, you can reap a tidy profit with only a small amount of cash if your risk appetite is extremely high. Sell short 50 strike call options out to August. If interest rates climb between now and then you will capture some of that gain. You need about 30 options per $100,000 of loan you’re hedging. The funds needed are around $20,000 in such a situation to cover the margin requirements, plus the premium received. Most brokerages pay you interest while the funds are held. You reap the gain from time premium and lower option price if rates climb and TBT follows suit. Once again, Nordland (and any kind readers in the room), this is is a tremendously risky transaction I don’t recommend for anyone accept those with the financial situation to withstand the risks.

      • Nordland on February 9, 2018 at 1:37 pm

        Thank you so much for advise!

        I’ll probably end up going with TBT or something alike. Call options are way above and beyond my understanding, so I definitely wouldn’t risk my money going with something I barely can grasp.

  10. Zachary Norris on February 8, 2018 at 11:19 pm

    I just wanted to say that this is a fantastic article and very well timed. As a young investor, I haven’t been able to see such losses in my lifetime yet. Yes, I was alive during 2007/2008, but I was unfortunately not able to independently enter the market until nearly a decade later. At that point I was just investing in things such as silver and gold from saving my chore and birthday money! Now that I’m older however, I have been able to explore more investment opportunities, and it is great to read about the current market situation from someone with more experience so that I can better educate myself.

  11. t @ Career Crisis Accountant on February 10, 2018 at 8:28 am

    I try not to look at my balances so I don’t panic in situations like this. I actually haven’t logged into my account this week so I have no idea on what the market volatility has done to my balances. I have a weekly plan to add to my investments and I keep to that plan, no matter what the market does. Helps me keep a steady hand and not do any5ing drastic when the market makes strong moves in any direction.

  12. MrFireby2023 on February 16, 2018 at 6:23 am

    I really enjoyed this article. I loved how you kept adding cash to your equity investments (up to 1987) to stay at your high water mark. That’s a novel approach and it worked well for you.
    Like you I raised cash (in 12/17) as my equity investments had appreciated since my purchases in 2011, 2015 & 2016 (I closed my eyes and jumped in during the occasional pullbacks in the market). I’m now heavily in cash awaiting re-entering at much lower levels AND I’ve been deploying cash into alternatives (take a look at as they offer high quality class A real estate).


  13. J.B.Stevens on March 1, 2018 at 10:09 pm

    When employment is strong and there is very little if any mention of layoffs in the news, I look at even a huge pull back as simply taking money off the table to take profits and then re-balance on the way up again and eventually they’ll do it again and again after that. Hopefully only Wall Street is selling (no retail), I often think there is a club and someone winks to the members to sell so yeah, to a degree, I feel it is a rigged market (short term wise). And of course media has to hyper vent for ratings and clicks too.

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