For one group of investors, the end of 2018 was a harrowing experience of volatility. In just four months, the Nasdaq fell more than 23% -- a drastic short-term drop. Certain stocks were hit particularly hardNetflixAmazon, and Apple saw shares fall by one-third. People phoned their brokers, pulled out their hair, and endured sleepless nights, fretting about whether their precious nest eggs were gone forever.

If this seems extreme, imagine (or recall) what the Great Recession of 2008 was like. Stocks dropped 50% from their peak to trough. Decades of savings and investment gains were wiped out in one fell swoop! This wild volatility created crippling stress for many and put plenty of people's financial futures in jeopardy.

And yet, there has always been a second group with a distinctly different investment strategy. We don't hear much about them, because these people tend not to draw much attention. They have developed ways to cope with wild market swings and movements in such a way that their life isn't affected by volatility. Not only do these people experience equanimity, but they tend to perform better as investors as well. Their time in the market has taught them that such episodes represent a time to buy -- not to panic. 

What's their secret?

A young man is sitting on a rock on a summit overlooking a vast ocean of clouds.

Rise above the short-term clouds to get some perspective on volatility. Image source: Getty Images.

Using these five strategies can help you join the calm and composed investors who stick to their buy-and-hold plans, even when the market tanks:

  1. Journal when you buy: Write down your investment thesis, or why you believe in the stock you purchased, and what would have to happen to alter your commitment to the company and sell the stock.
  2. Review long-term trends: Putting the market's history into perspective will show you that stock-market corrections are quite minor in the long run.
  3. Devise a plan for market volatility: If you're prepared for the inevitable market drops, you'll grow stronger as a result.
  4. Put your head in the sand: Limiting how often you check your portfolio is actually good for your mental, emotional, and financial well-being.
  5. Remember your "why": Investing can give us a rush, but remembering why we do it in the first place should calm our nerves.

Let's examine these one by one.

1. Journal when you buy

The power of journaling rivals that of compound growth.

Evolutionary psychologists will tell you there's a fundamental mismatch between the environment we are made for and the one we live in. One psychologist, Dr. Mark Van Gurt, describes it:

More than 99 percent of human evolution took place in small-scale societies, hunter-gatherer groups of 50-150 individuals ... Only since the agricultural revolution, the last 1 percent of human evolution, did human societies grow in scale and complexity and this produced toxic ... arrangements for many.

Simply put, our minds and bodies are still made for us to be hunter-gatherers. In that environment, we would rarely experience enormous stressors. But when we did, they were usually life-or-death circumstances (think: tree falling, or lion stalking us). The event happened, a fight-flight-freeze response would set in, we would act, and the situation would be over. We'd either survive or die, and then -- if we survived -- move on with our day.

We don't live in that world anymore. Critically, some stressors that cause the fight-flight-freeze response can be omnipresent -- seeming to never go away. For jittery investors, a major swing in the stock market can trigger this reaction.

That's why keeping an investing journal is so important. Every time you buy a stock, you should:

  1. Lay out your reasons for buying the stock in terms simple enough for an eight-year-old to understand. Forcing yourself to make it this elementary might sound corny, but it will force you to distill your thinking to the core of what matters.
  2. Imagine what would have to happen (scenarios like bankruptcy, regulatory issues, revenue drops, leadership changes, or dividend cuts) to make you consider selling the stock. 

This process has been invaluable over my decade of investing. Of course, something impossible to predict might happen that makes me want to sell a stock -- but simply devoting time to visualizing what could happen and practicing bracing through the bad times is a valuable exercise. It also makes it easier for me to make a decision about whether I can realistically buy and hold the stock.

Last summer, the European Union levied a $5 billion antitrust fine on Alphabet, parent company of Google. That sounds like a huge, scary number. Alphabet accounts for more than 10% of my family's portfolio.

But instead of panicking, I reviewed why I bought Alphabet: It's founder-led and mission-driven, and it has more data than any company in the world. The fine, while onerous, didn't change any of those fundamentals, so I resisted selling, and the company has done just fine.

Keeping a journal slows down your thinking. This helps your brain move out of the fight-flight-freeze response that makes you act on instinct, instead engaging the slower-thinking, more calm and analytic part of your brain. That's the part of your psyche you want to depend on when making long-term investment decisions.

2. Review long-term trends

Sometimes, simply backing up and looking at the long-term trends of the stock market is enough to calm investors' fears and frustrations. Let's put the three major stock-market declines into context.

  • The first is the 1973-1974 stock-market crash where the Dow Jones lost 45% of its value. 
  • In the 1987 crash, the broader market fell 23% in a single day!
  • The third is the Great Recession of 2008.

Each of the corresponding arrows points out where stocks stood when these drops occurred, respectively.

Chart showing S&P 500 returns over time, with arrows to corresponding drops

Arrows by author. Image source: YCharts.

The takeaway is simple: Market crashes can be scary, but history is a wonderful teacher. Even if you buy at the absolute worst time, by keeping your diversified portfolio in the market for the long run, it is highly likely it will not only recover, but grow much higher in value. Look at the above graph the next time market volatility gives you the jitters, and consider these scenarios:

  • Even if you invested at the worst point of 1973, your investment in the market would still have returned 258% (in other words, more than tripled) over the next 20 years.
  • Invested the day before the market dropped 23% in a single day in 1987? Worry not, the next 20 years returned 444%, a quintupling of your money.
  • And if you were unlucky enough to buy stocks on October 11th, 2007 -- at the beginning of the Great Recession -- you'd be OK today. It's only been a little over 11 years, and you're already sitting on gains of 71%. By the time the 20-year time frame is up, who knows how high your shares might be?

3. Devise a plan for market volatility

Here's the thing about market volatility: It's completely normal and natural. Former Motley Fool columnist Morgan Housel crunched the numbers and found this:

Total Drop Occurs This Often
10% Every 11 months
15%  Every 24 month
20% Every four years
30% Once per decade
40% Once every few decades
50% Two or three times per century

Putting that in context is enormously helpful. The 20% drop we experienced in late 2018 wasn't the sign that the world was ending. It was a sign that the markets were healthy, following the same general pattern from the past.

Many people think the last bear market was the Great Recession of 2008 and 2009, where the broader market lost over 50% of its value. But that's not true. Between May and October 2011, the S&P 500 index dropped 21.6% -- one of those "one-every-four-year" events. But nobody even remembers that because the markets came roaring back -- returning over 120% over the next five years, including dividends.

There are two things you can do with this knowledge:

  1. Use it to mentally fortify yourself for downturns.
  2. Develop a plan for when market volatility occurs.

Housel did exactly that, deciding if he had $1,000 set aside to invest, he would deploy it as such:

Total Drop Money to Invest in Market
10% $100 or 10% of his investable cash
15%  $220 or 22% of his investable cash
20% $300 or 30% of his investable cash
30% $130 or 13% of his investable cash
40% $125 or 12.5% of his investable cash
50% $125 or 12.5% of his investable cash

The value of this exercise does not lie in following this plan as gospel. Instead, the value lies in the mental frameworks you employ in devising it. Rather than looking at market drops as a threat, you start to view them as buying opportunities. 

Morgan said:

Will I follow this plan to a T? Probably not. But it got me thinking about volatility. Putting these numbers on paper forces you to think about big market drops as opportunities to exploit, rather than crises to fear. It's actually hard to think about these numbers and not want the market to crash. And most important, it provides a guide to consult when stocks do crater, based on a cool-headed analysis of history rather than an emotional reaction to the guy on TV telling me to panic.

Rest assured, there are as many different plans for market drops as there are investors. Motley Fool Co-founder David Gardner often says he doesn't change his strategy based on the market, instead buying one or two quality stocks every month, no matter what.

In essence, this method is the same as dollar-cost averaging: putting the same amount of cash into the market on a regular schedule. When the market is high, that means you'll buy fewer shares of a company. When the market is low, that same amount of money will buy more shares of the same company. Over time, it theoretically evens out to produce wealth-generating returns.

The only "wrong way" to devise a plan is to panic sell. Selling when the market is down, and below your cost basis for your stocks, means you lock in your losses and eliminate any potential for future gains. By only investing money that you don't need during the next three to five years, you can avoid the temptation to sell in a tizzy when the market plunges. You don't need the money in the near term, so it can stay in the market until it recovers and returns to a bull scenario.

4. Put your head in the sand

Ignorance can be bliss when the market tanks. According to a former employee, Fidelity once did a study to determine which investors performed the best over time, and the results were astounding: The best-performing portfolios were the accounts of people who forgot they had a Fidelity account.

This is a crazy finding -- but it shouldn't that that surprising. Fool contributor Matthew Frankel found most investors get terrible results. While the S&P 500 returned about 11% between 1985 and 2015, the average investor averaged just under 4%.

To put that difference into perspective, $1,000 invested in a fund that simply tracks the market would have turned into roughly $23,000. But if an individual investor kept watching their portfolio every day and trading as a result -- using the 4%-per-year findings -- they would have about $3,250 by the end of 30 years.

Why does this happen? There are lots of possible explanations, but the easiest one is this: When it comes to investing, we are our own worst enemies. If we go back to the psychological mismatch theory, this makes more sense; there was no equivalent of the stock market as we evolved. Too often, we equate the stock market with our sense of safety -- a dangerous conflation.

In tribal times, our friends and family were our source of safety. They almost never disappeared or were wiped out in a moment's notice, and if they were, it was truly a time to panic and activate that fight/flight/freeze reaction. Stocks don't work like that, but our automatic response does -- which makes a strong case for rarely checking our portfolios.

This doesn't have to mean never checking them. Motley Fool analyst Tim Beyers said: 

About a decade ago, I stopped quoting the market and my stocks daily. It just wasn't worth it to get lost in the potential value I was gaining or losing on any given day. Emotional losses (or gains) are like interest paid -- it's painful, it's costly, and it can drain the life out of you.

Spot on. While I do scan my own stocks to identify major moves that might indicate breaking news, I only look at my overall holdings once a month. Adopting a similar technique can be good for your portfolio as well as your emotional and mental health.

5. Remember why you invest in the first place

Finally, think about the reason you're tying your fate to the market's. Remembering the purpose of investing is important when the market is down, but it's enormously important regardless of the economy's state.

Over twomillennia ago, Aristotle postulated that true aim of life was happiness -- or eudaimonia. My guess is that few people would argue with this -- depending on their definition for "happiness." Indeed, an entire new field in psychology -- dubbed "Positive Psychology" -- is starting to shed light on Aristotle's ideas. 

Dr. Martin Seligman led a team of researchers who found that well-being can be achieved through:

  • Positive emotions -- like joy, excitement, contentment, or physical relaxation.
  • Purpose and meaning -- which includes using one's strengths for something larger than themselves.
  • Healthy relationships with others -- bonding and connecting with other people is key to finding your place in the world.
  • Engagement in life -- losing yourself in your activities, sometimes referred to as "flow."
  • Achievement -- the sense that you are making progress in whatever you are doing.

American culture is exceptional at making us forget about all of these virtues, and instead get caught up in measuring ourselves by the size of our bank (or nest egg) account, and the collection of our possessions. Probably because it's easier to measure our physical state; there's no room for interpretation of your bank balance or your belongings. Measuring the health of your relationships, or the purpose and meaning in your life is a deeper, more complex task. And yet, it is the latter that truly adds years to your life, and that is yearned for by most.

Money's purpose is to do two things:

  1. Provide the basic necessities of food, water, clothing, and shelter.
  2. Create the circumstances for personal freedom that allow you to focus on your relationships, meaningful pursuits, and activities that lead to flow.

In his book Flourish: A Visionary New Understanding of Happiness, Seligman admits he dealt with anxiety over his investments during the Great Recession. But he applied the same framework of well-being, and tried to predict how having less money might affect him, and came up with these visualizations:

  • He would experience less positive emotion, sacrificing conveniences he enjoyed like eating out and massages. This was the biggest drawback.
  • His purpose and meaning would be unchanged. This is a major benefit of finding a job you love -- one you'd continue doing even if you weren't paid. Seligman said that he's so passionate about his work, he'd like to see someone stop him.
  • Paradoxically, his relationships would probably improve as a result of a prolonged downturn. Instead of dinners out, his family would cook together at home; trips would be replaced with staycations that have him and his family interacting with the community.
  • Engagement in what he's doing would also be unchanged. Both his work and his hobby of playing bridge give him a state of flow that's relatively unaffected by his investments.
  • His achievement would be a function of how he performed in what he was doing, not his investments.

As you can see, while positive emotions might dip during a downturn, everything else that makes up his well-being would either stay the same or even improve. Of course, this isn't the case for everyone -- we don't all work jobs we'd continue doing if we weren't paid for it.

But that doesn't mean we should write-off this exercise. In the end, it's a reminder that money is best viewed as a necessary tool. The most conclusive findings say that money itself doesn't actually add to happiness -- it just limits your downside of unhappiness.

Once your basic needs are met, everything else -- purpose, meaning, engagement, relationships, achievement -- is what matters. Remembering this can go a long way in helping you keep your calm during a market meltdown.

Be good to yourself

No investor is perfect. You will make mistakes along the way. Everyone does it. I bought my first share of Alphabet at a split-adjusted $150 -- and sold it a few months later for $300. If I had kept it, I'd be sitting on a seven-bagger investment.

But that's the price of admission to an education in the markets. Be good to yourself when you make mistakes, and don't compound them by quitting investing after a scare. And when the next bear market hits, be sure to use all five strategies above to keep your cool, saving your sanity and growing your money in the long run.