Markets have a funny way of lulling us to sleep and fooling us into dreaming about a price graph that goes up and to the right. When market volatility is muted for long enough, the slightest tremors can cause fear and anxiety. I’ve read the books about behavioral finance and have spent hours with behavioral experts, and yet two weeks ago, a market sell-off in SPACs had me questioning my entire investment thesis. SPACs retreated 20% in a few days and have stayed down since.
I know exactly what I’m supposed to do. One of my investment aphorisms is "don’t just do something, sit there," which came out of writing The Surprising Cost of Volatility eleven years ago. I even have a post-it note on my computer that says “Slow Down the Decision” as a reminder to rebuff one of my suboptimal instincts. Yet even with that awareness and preparation, I felt butterflies fluttering in my stomach. I managed to sit on my hands appropriately (this time), but the moment left me wondering what will happen the next time a real McCoy takes hold in markets more broadly. Volatility has been muted for a while and will be painful when it resurfaces, both for our balance sheets and our emotions. I'll try to heed my aphorism again when the time comes. It's simple, but it's not easy.