I’m guessing there are a lot more people paying attention to the stock market than we’ve had over the past few years.

Market volatility tends to break folks out of their daydreams and yank them back to reality.

Having experienced both the 2000 dot-com and 2008 great recession at varying levels of participation, I have enough perspective to distinguish between a real market spanking and a milder pinch.

The recent activity would definitely be classified as a mild pinch in my book. A real spanking would require the S&P 500 to drop to the 1400-1500 range from its recent high of 2873.

That would be similar to what happened back in 2000 and 2008. I’m not suggesting history will repeat itself, but a significant correction is probable.

Those two periods drastically shaped my outlook on investing, and likely explain my inclination to be more conservative in my investments.

It’s impossible to tell where the markets will go from here. I’ve learned the hard way that’s a fool’s errand. All we can control is our emotions and reactions.

How you should handle the market when it gets unruly will largely depend on what stage you’re in concerning your financial journey.

Debt Elimination

If you’re carrying a great deal of debt, and your income barely covers your expenses each month, the stock market should be the least of your worries.

I know it’s painful to watch what seems like everyone around you get rich off sky-high stock market returns, or whimsical bitcoin returns. Ignore the noise. Your only focus should be to destroy that debt.

It’s the only guaranteed financial strategy you can bank on.

The faster you do it, the quicker you’ll be able to graduate to wealth accumulation.

If you eliminate debt from your life, you'll also be in a much better position to capitalize on opportunities in the future once you've progressed to other stages.

How to handle market volatility if you're in this stage:  

Don't Participate 

Wealth Accumulation

This stage is all about growing your financial nest egg as quickly as possible.

It requires abnormal savings rates and the ability to delay instant gratification. There is only one strategy that carries the highest probability of success. Constant and relentless investment of your disposable income, into low-cost index funds.

You should avoid getting seduced by your brilliant stock-picking abilities and just come to terms with the fact you’re not that smart. No one is in the long run.

If you’ve got a gambling itch to scratch, limit your exposure to no more than 10% of your total net worth (excluding your primary residence).

While in this stage, I got a good dose of humble pie during the 2008 financial crisis. I chased individual stocks up and down and got destroyed in the process. Had I stuck to a simple index investing strategy and consistently contributed my excess funds, I would have survived the volatility unscathed.

I was younger then, and believed that short cuts were possible. What I’ve learned since is that I prefer a highly probable strategy to dumb luck.

If you’re in the wealth accumulation stage and started investing after 2008, you haven’t yet experienced a real market correction.

It’s difficult to describe the emotional toll it can have. It’s all good when you’re playing with “house money,” but when your hard-earned cash goes into deep red territory, it's a whole different ball game.

If you're faced with a significant market correction during this stage of life, count yourself lucky.

Best to ride out this period by ignoring your account balance, and plowing even more excess funds into simple, boring, yet effective index funds.

How to handle market volatility if you're in this stage:  

Stay the Course 

Wealth Preservation

Once you become financially independent, your number one priority is to hold on to that hard-earned money.

This is when your risk sensitivity evolves.

You're no longer as cavalier with your investments as your younger days. You spend most of your energy on net worth allocation and focus on slaying the inflation monster.

As long as your portfolio is beating inflation each year, you're not interested in taking on unnecessary risks. Indeed, your net worth and investments won't be growing as aggressively as your wealth accumulation days, but you're now wise enough not to let that bother you.

Market volatility becomes a fascinating sideshow and an opportunity to balance your portfolio.

How much time you spend in this stage will have a lot to do with how quickly you reached it, to begin with, and whether you plan on taking a more unorthodox route.

How to handle market volatility if you're in this stage:  

Get out the Popcorn

Wealth Independence

This stage is reserved for a select few who can convert their accumulated wealth into an independence engine.

It goes beyond simple wealth preservation and aims to leverage your assets to enable a financially worry-free existence.

This could include abstaining from a traditional career, pursuing endless leisure activities, exploring the world and/or giving back to your community.

This stage is often referred to as retirement, but its maximum impact can only be enjoyed if you reach it in relatively good health and a decent age.

There's a tremendous amount of diversity when it comes to people who have reached this stage. The profile of those individuals will vary significantly based on their expense level, geographic location, net worth size, and corresponding passive income potential.

The main thing in common that all these individuals have is a resilient portfolio. Their net worth is made up of multiple passive income streams, which can withstand periods of market volatility without compromising their independence.

This takes years of meticulous and deliberate planning, as well as plenty of sacrifices along the way. As a result, market volatility is simply an opportunity for fine-tuning and minor adjustments.

How to handle market volatility if you're in this stage:  

Just Smile and Wave

Closing Thoughts

The way you react to market volatility will be very dependent on what stage you're in, as well as your prior experience. How you SHOULD react versus how you WILL react are often two completely different scenarios.

Emotions have a powerful influence on behavior.

After riding the emotional roller coaster ten years ago during my wealth accumulation phase, I realized that the best way to handle emotional investing is to neutralize it.

When you buy highly diversified index funds, the likelihood of those index funds going to zero is armageddon. If they do, society as we know it seizes to function. And nothing ultimately matters anyway. Hard to waste precious sleep hours worrying about that.

The emotional intensity I have watching an index fund drop is minimal compared to watching an individual stock.

When you buy risky assets like bitcoin, the next hot stock, or some other speculative gamble, you subconsciously know that losing your entire investment is a real possibility. That's when emotions bite you in the ass.

The majority of your investments should be allocated to low emotion assets. That's the best way to avoid getting a good spanking in the long run!

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About the Author

Max

You can call me Max…I’m a Gen-X executive planning to retire from the corporate grind by the age of 45. Although I'm already financially independent, I haven't yet reached true financial freedom. Join me on my journey as we discuss everything from personal finance to travel and beyond.

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