In this quote, legendary investor Warren Buffett highlights how often, simply waiting out market fluctuations can be more profitable than frequent trading, especially during periods of market stress.

As a portfolio manager for over 30 years, I've witnessed more than my fair share of market volatility, crisis events, and head-spinning news flows.

Whether it was the bursting of the dot-com bubble, the global financial crisis, trade wars, or the more recent pandemic and geopolitical shocks - at times, the noise and hysteria in the markets reached a deafening volume.

In the heat of those moments, with red flashing across trading screens and pundits shouting doomsday prophecies, the urgency to "do something" can be overwhelming for investors. We're hardwired to want to take action and regain control when things feel unstable and uncertain.

However, I learned that giving in to that urge and letting fear override discipline is often the worst thing you can do as an investor.

More times than not, the best move when markets are unraveling is to mute the noise, step back, and let your head clear before making any hasty decisions.

Moreover, drawing on decades of experience as a portfolio manager, I've observed that the most successful investors aren't always those who act the fastest, but those who have mastered the art of waiting for the right time to act.

The Downsides of Reacting

Stress, especially during periods of market volatility, can have a profound impact on an investor's decision-making abilities.

The stress response, often called the "fight or flight" reaction, can narrow an individual's focus to immediate, short-term threats. This can hinder one's ability to engage in the complex thinking essential for making strategic investment decisions.

Studies have shown that stress induces a bias toward selecting immediate rewards and avoiding immediate threats, often at the expense of long-term benefits.

Stress disrupts the way the brain weighs risk and reward by altering the function of neural pathways involved in making economic decisions.

Under stress, individuals are more likely to make decisions that are less about the optimal outcome and more about the quickest escape from their current state.

The dangers of reacting rashly in turbulent markets are plentiful:

• You can end up panic selling at the worst possible times, locking in losses and missing the eventual rebound.

• You can also fall victim to herd mentality, getting whipsawed into poor trades by following the prevailing market narratives of the moment that often prove fleeting.

The Clarity that Comes from Pausing

By going against the powerful impulse to "do something" and instead taking a moment to reflect, you allow yourself to observe and gather more information as the dust settles.

I can't count the number of times when hitting the pause button and letting a situation play out resulted in a much clearer and more informed perspective to act from down the road.

One example was in late 2018 when trade war fears and concerns over Fed rate hikes sparked a vicious sell-off. At the time, with bearish headlines growing by the day, it felt like a market meltdown was coming any day.

However, by staying calm rather than getting all emotional, it became evident over the following months that the situation was more bark than bite for the real economy. Those who stayed the course or opportunistically bought that dip were well-rewarded once cooler heads prevailed.

In today's climate of destructive global conflicts, terrorism, war, lingering inflation, and political chaos, the urge to make impulsive moves is strong.

• Should I get out of equities while I’m still ahead?

• Should I go to all cash for now?

• Should I just buy gold and stash it away in my bunker?

At the moment, the capital markets seem overly negative.

Volatility is spiking, interest rates have risen sharply, and the Fed is nowhere near lowering rates.

What’s changed from a couple of weeks ago?

• Didn’t the latest job report show a healthy employment situation?

• Isn’t the US economy outperforming most other large economies?

• Aren’t we expecting a 7% growth in earnings for the S&P 500 in Q1?

• Aren’t positive real rates a good thing?

For sure, there are negatives. There always are.

Please show me a bull market where market pundits don’t get on TV and tell us why this is all about to fall apart. Over my career, I have heard it all.

• The market is too expensive.

• These margins are unsustainable.

• The Fed is behind the ball.

• The US dollar is losing its status as the reserve currency.

• The next President is going to destroy our economy.

• It’s all a big Ponzi scheme.

Being negative may sound smart, but it isn’t always so. 

Being negative is looking at only one side of the coin.

It’s ignoring the fact that capital markets go up most of the time rewarding investors for taking a risk.

When things get dicey in the markets, staying calm and allowing time for the fog to clear is usually the best path forward.

When it comes to investing, there is certainly a time to be proactive and make decisive moves when the evidence is apparent.

However, when markets seem hopelessly tangled and noisy, taking a pause and keeping dear Ben's famous adage in mind – "this too shall pass" – can be the wisest decision of all.

Examples of when remaining calm paid off

Over my 30+ years of investing, I have never experienced one year when things did not appear to go off the rails at some point. There is always volatility, there is always uncertainty in the markets.

Investing may appear easy but that is true only in hindsight.

When you’re in the foxhole dodging the bullets your nerves are frayed and you just want to do something, but the best course of action is most likely not to run out and seek an illusory sense of safety.

Most times it’s best to remain calm and wait for the smoke to clear.

These next instances of market fear illustrate the need to remain calm.

2011 Euro Debt Crisis Selloff

In 2011, worries over a potential Greek debt default and the broader European debt crisis sparked a 19.4% drop in the S&P 500 from May through October.

However, the market quickly recovered those losses in just under 4 months after political and monetary leaders agreed on measures to address the crisis.

2018 Correction Amid Trade War Fears

As mentioned in the previous example, the late 2018 selloff from October to December was precipitated by escalating U.S.-China trade tensions and fears of Fed overtightening.

The S&P 500 fell nearly 20% peak-to-trough during this period. But it took only 3 months for the index to recoup those losses as underlying economic conditions remained sturdy.

COVID-19 Pandemic Crash of 2020

This was one of the most abrupt and aggressive selloffs in history, with the S&P 500 plunging 34% in just 33 days after COVID-19 erupted across the globe and economies locked down.

However, after the Federal Reserve unleashed a tidal wave of monetary stimulus, the markets roared back with the S&P 500 recovering all losses in just 5 months - one of the fastest rebounds on record from a drawdown of that magnitude.

Quick Facts About Corrections

Looking at market data across decades, research shows that corrections of 10% or more in the US stock market occur about once per year on average.

Bigger drawdowns of 20%+, which are classified as bear markets, happen about every 3.5 years.

While their frequency is fairly regular, the duration is typically short-lived if economic fundamentals remain robust.

The average length of time for the S&P 500 to recover losses from a 10% correction since 1950 is only around 4 months.

For bigger 20%+ bear markets, the average recovery time is 14 months.

In the bond market, large double-digit drawdowns are less common given bonds' lower volatility compared to stocks.

However, we have seen several tremendous sell-offs in recent decades like in 1994 when the 10-year Treasury yield spiked 3 percentage points in a year.

Or in 2022, when the Bloomberg US Aggregate Bond Index suffered a 13% peak-to-trough decline amid the most aggressive Fed tightening campaign since the 1980s.

Bonds are slower to recover from corrections than stocks, but over time losses are recouped.

While historical data points vary, the key is that markets have a very high probability of recovery given enough time to let the turbulence subside.

• Since 1926, there has been one ten-year period (1930-39) with losses in the U.S. stock market.

• Based on the 10-year U.S. Treasury yields, there were no losing 10-year periods for U.S. bonds since 1926. Every overlapping 10-year window showed positive average annual yields.

Having that perspective during the throes of a correction can prevent rash decisions that could do lasting damage to your financial assets.

What do I do when market stress gets to me?

I’m not perfect. I get nervous when my investments drop in value. I get excited when my portfolio has large gains. I’m like you most likely!

But regardless of how I am feeling at the moment, I don’t always feel compelled to do anything about it. I have learned not to get too high or too low.

I look at my liquid investments the same way I look at the value of my real estate investments.

Zillow gives me an estimate of what my properties are worth, but I know from experience that the minute you put up your property for sale the value changes to what the “real” market says it is.

It’s the same way with your liquid stock and bond investments. The value of your portfolio on your last brokerage statement is no longer the value today.

Supply and demand resets every single second in global capital markets. Your portfolio is worth what the market says it is at this point in time, but the one thing you know for sure is that things will change in the future.

A mindset refresh or reframe allows me to remain calm and seek clarity before making any decisions.

In addition to playing mental judo here are some of the things I do when my portfolio is suffering:

• Exercise or go for a walk outdoors. Getting physical activity and fresh air is incredibly grounding for me.

• Watch a comedy or some sports. With YouTube, I can always watch tennis or soccer highlights from around the world. And if sports do not work, I watch reruns of The Office. Both are a great distraction.

• Listen to some music. It could be classical or my favorite 80-90’s music. There is probably not a day that goes by when I don’t listen to some Earth, Wind, and Fire. It’s my mood modulator.

• Visit my local library. I love books and chatting with the librarians always reminds me of a larger world outside of the capital markets. I love seeing little kids enjoying story time, reading a magazine, or simply browsing through the shelves to see what’s new.

• Turn off my screens. I purposefully disconnect from financial media to avoid getting even more worked up. I get away from my work desk.

The key idea is to create physical and mental distance from the source of stress.

You’ll be happier and your portfolio will benefit from some alone time.

When markets are convulsing and daily headlines scream of imminent doom, the urge to "do something" with your portfolio can be overwhelming.

Our instincts demand we take action to regain control over circumstances that feel wildly uncertain and threatening.

However, the prudent investor must resist this powerful urge and avoid compounding short-term turmoil through rash decision-making.

History has proven time and again that in the throes of a market downturn, sitting tight and going against your emotional impulses is often the wisest path.

Those of us who have experienced multiple boom/bust cycles know that the data point or narrative dominating today's market psyche often proves fleeting or entirely incorrect with more perspective over time.

Temporary volatility and downside moves are inevitable facts of investing that must be emotionally accepted.

Of course, there are certainly times that call for adjusting portfolios and making proactive moves in the face of shifting fundamentals and opportunities.

However, those decisions should be driven by an analysis of the fundamentals - not fearful reactions and impulses. Restraining one's self from taking any action in the heat of a correction often turns out to be the wisest decision of all.

Most of us are biologically hardwired to want to act immediately for relief from discomfort.

Mastering the impulse for immediate relief, giving volatility the chance to subside, and allowing the skies to clear is what separates the successful long-term investor from the rest.

Asset Allocation Performance Review

High-Level Observations:

• It’s best to ignore the capital markets over the last week. Everything except commodities and cash is down for the week. The last week has been one of the worst times since the bear market of 2022.

• The less risky asset allocation portfolios we monitor are now in negative territory for the year. Bonds have done poorly this year as expectations for a Fed cut have failed to materialize.

• Equity-heavy allocations have outperformed more conservative allocations thanks largely to the performance of US large-cap equities but the last couple of weeks have been brutal.

• The GF High-Risk strategy is up only 1.9% on an annualized pre-cost basis over the last three years. Over the last 5 years, the strategy is up a respectable 6.7%.

• Year to date, commodities have provided a nice boost. A big reason is higher oil prices. Most recently, precious metal prices have joined the party providing a further boost.

• Real Estate has proven to be a huge disappointment for US investors. The extreme yield sensitivity of the asset class has surprised us. Valuations for most real estate sectors remain attractive. Real estate typically does well in inflationary environments given their real asset exposure but investors are hyper-fixated at the moment on financing risk and office space occupancy rates.

• Both Real Estate and US Small Caps have at the moment negative sentiment. Assuming that at some time later this year, the Fed does lower interest rates, I would expect both of these asset classes to be the main beneficiaries. For investors with a high tolerance for risk, this is where I would look for opportunities to profit from the doom and gloom.

Weekly Performance Attribution

A Bit of Wisdom Never Hurts

Disclaimer: This newsletter is not trading or investment advice but for general informational purposes only. This newsletter represents my personal opinions which I am sharing publicly as my blog. Futures, stocks, and bonds trading of any kind involve a lot of risk. No guarantee of any profit whatsoever is made. You may lose everything you have. We guarantee no profit whatsoever, You assume the entire cost and risk of any trading or investing activities you choose to undertake. You are solely responsible for making your own investment decisions. Owners/authors of this newsletter, its representatives, its principals, its moderators, and its members, are NOT registered as securities broker-dealers or investment advisors either with the U.S. Securities and Exchange Commission, CFTC, or with any other securities/regulatory authority. Consult with a registered investment advisor, broker-dealer, and/or financial advisor. By reading and using this newsletter or any of my publications, you are agreeing to these terms. Any screenshots used here are the courtesy of Global Focus Capital and Retirement With Possibilities. The data, quotes, and information used in this blog are from publicly available sources and could be outdated or outright wrong - I do not guarantee the accuracy of this information.