How to Navigate Market Volatility

Here's a great interview with John Bogle, founder of Vanguard, on how you should navigate any market volatility. Get through the commercial and watch this video. It's definitely worth your while and will only take less than 4 minutes:

There are some great take home points that Bogle makes. I've added some of my thoughts on this as well:

1. You can think of the daily swings in the market as pure speculation. Speculators are trading with other speculators daily and causing wild swings in the market. In the long run, however, markets reflect the growth of economies around the world. If you're a long term investor, you participate in this long term growth.

2. I love it when he says that one day the markets act as if it's the apocalypse and the next day it's nirvana. Just scan the media headlines everyday. It seems like one day the markets plummet because they anticipate another recession and the very next day the markets soar because they anticipate higher economic growth. The point is, you just can't predict any of this.

3. Another timeless Bogle quote is to "Don't do something. Just stand there." Psychologically you're tempted to do something in investing--usually this means selling when the stock market goes down. But it's incredibly difficult to know when to get back in. And usually "doing something" causes more harm than good.

4. If you are going to do something, then rebalance your portfolio within reason. This means to buy stocks at lower prices. So if your target allocation is 70% stocks and 30% bonds, perhaps now you're at 65/35. That means you should rebalance back to 70/30 either with new cash flows or selling some bonds and buying stocks.

5. Is this a "new normal" in investing? I'll write more about this in future posts, but according to Bogle, the boring buy and hold strategy of investing still works if your time frame is long enough. Remember that the timeframe for your portfolio is your entire investing lifetime not just until the day you retire.

6. Finally a great point made here is that you have better things to do with your life than to look at the daily speculative swings in the market. Don't let it distract you from the truly important things in your life--your family, your health, and your career. A well structured portfolio--like the ones I create for my clients--frees up your time to focus on the truly important things in your life.