Market Volatility: Magnitude vs. Percentage?

If you’ve ever listened to public radio’s “Marketplace” with Kai Ryssdal, you may have noticed the songs they play when they “do the numbers.” On days the market is up, it’s “We’re in the Money.” On down days, they cue up “Stormy Weather.”

These musical accompaniments are a way to acknowledge the emotion listeners may be feeling when they learn whether markets have spiked or sunk on any given day.  Ultimately, it’s lighthearted stuff. But it’s one example of how the media uses various tactics to play to your emotions and make the financial market news more compelling. Some of these ploys are more insidious than others.

Consider, for example, how the media discusses market volatility using magnitude versus percentage—a point Wall Street Journal columnist Jason Zweig has noted. While both ultimately describe the same thing, magnitude—the number of points a given index rises or falls—is often more sensational.

For example, on Monday, August 5, 2024, the Dow Jones Industrial Average fell 1,033.99 points from the previous week’s close. That number sounds big and scary to many people, quickly grabbing their attention. And that’s what news sources often want to do.

Unfortunately, this number doesn’t account for the index’s starting point. On August 2, the Dow Jones closed at 39,737.26 points. Divide 1,033.99 by 39,737.26, and you’ll discover that this roughly 1,000-point plunge represented a 2.6% drop in the index. That’s a sizable one-day decline, but we’d wager it sounds far less scary by that measure.

Five Ways to Strategize Your Behavioral Biases

Your brain can be quite tricky with some 95% of its activity occurring subconsciously.[1] With every spontaneous signal, our cerebral synapses expose us to countless behavioral biases, duping us into making misguided money moves long before our rational resolve kicks in.

These biases can affect our investing behaviors and decisions. We may leap before we look, making choices based on emotions rather than rational planning.

Because many of our most powerful biases are based on reflexive rather than reflective thinking, it’s not enough just to be aware of them. We must also learn how to defend against them. Or better yet, turn behavioral biases to our advantage. How do you do that? By tricking your brain right back.

Biasing Toward Better Behaviors

To illustrate this principle, here’s one “trick” that has worked incredibly well for retirement plan participants.

When companies started offering 401(k) retirement saving plans in the 1980s, employees were traditionally invited to participate but were not automatically enrolled. In other words, you had to take deliberate action to get started and increase your contributions over time.

Today, you can still decide if and how much you’ll contribute to your company retirement plan. But instead of requiring you to opt into participating, many companies now auto-enroll you unless you deliberately opt out. Your employer also may automatically increase your contribution rate to the maximum allowable amount over time, unless you say no. By requiring action to avoid saving for retirement, you can trick yourself into saving more than if you had to take action to start saving. Thus, we recruit our tendency to favor inertia, using it to improve on, rather than detract from retirement plan participation.[2]

Your Portfolio Performance Compared to What?

Ah, we restless humans. Sometimes, it pays to strive for greener grass. But as an investor, second-guessing a well-planned portfolio can leave you in the weeds. Trading in reaction to the latest hot stocks or in response to fear tricks you into buying high (chasing popular trends) and selling low (fleeing misfortunes), while potentially incurring unnecessary taxes and transaction costs along the way.

Still, what do you do if it feels as if your investments have been underperforming? It helps to lead with this key question, to decide if the impression is real or perceived:

How am I doing so far … compared to what?

Compared to the Stocks "du Jour?" 

 It’s easy to be dazzled by popular stocks or sectors that have been earning magnitudes more than you have and wonder whether you should get in on the action.

You might get lucky and buy in ahead of the peaks, ride the surges while they last, and manage to jump out before the fads fade. Unfortunately, even experts cannot foresee the countless coincidences that can squash a high-flying holding or send a different one soaring. To succeed at this gambit, you must correctly—and repeatedly—decide when to get in, and when to get out … in markets where unpredictable hot hands can run anywhere from days to years.

Remember too, if you simply invest some of your money in the global stock market and sit tight, you’ll probably already own today’s hot holdings. You’ll also automatically hold some of the next big winners, before they surge (effectively buying low).

Rather than comparing your investments to the latest sprinters, be the tortoise, not the hare. Get in, stay in, and focus on your own finish line. It’s the only one that matters.

A Lesson on Long-Term Perspectives From Warren Buffett and Charlie Munger

In May, I was fortunate to attend the Berkshire Hathaway Annual Meeting recently with Dave Bromelkamp, Dave’s brother Mike Bromelkamp, and Derek Van Calligan. If you’d like to get a sense of the meeting’s atmosphere, check out Derek’s blog here: https://www.allodium.com/resources-2/allodium-blogs/the-responsible-investor.html.

The venue was full of excitement as the crowd anticipated soaking up the wisdom of Warren Buffett and Charlie Munger. The meeting format consisted of audience members asking the panel (including two other Berkshire Hathaway employees for the first half of the day) around 60 questions on topics ranging from why Berkshire Hathaway has invested in specific companies to their thoughts on estate planning. Many of the questions were regarding world events and current financial issues. The stories and perspectives shared by Warren and Charlie, each having nearly a century of life experience, were fascinating.

The recent bank failures came up early in the questions. Warren said, “The situation in banking is very similar to what it’s always been in banking…fear is contagious, always. As many as 2000 banks failed in one year after WWI…bank runs were just part of the picture.”