The Investment Scientist

The True Danger of Market Turbulence

Posted on: August 14, 2007


I am an amateur pilot. I remember vividly an episode happened during one of my training classes a few years ago.

That was a very windy day. Up to that point, I had only experience flying in calm weather. As soon as my Cessna took off, I immediately felt the difference. My plane was tugged and pulled in all directions by cross winds. I felt like I was losing control of the plane, and fear swelled up from the bottom of my spine to the top of my head. I sat stiffen in the pilot seat and my sweaty palms grabbed tightly at the control handles like a sinking person grabbing onto a straw.

My trainer sensed my tenseness and she asked: “Are you OK?”. Not willing to acknowledge my fear, I asked her instead: “Is it more dangerous to fly in turbulent weather like this?” The trainer smiled and said: “It is not more dangerous to fly in turbulent weather. The plan was built to withstand any turbulences. But occasionally, an amateur pilot would lose his cool and do something stupid. That’s the real danger.”

The instruction given to me by my trainer is equally valid for investors who are piloting through this turbulent stock market. If you are like all other investors, you would be caught up by fear and anxiety. What should you do? Should you dump stocks and move to bonds? Should you abandon the small cap value style of investing? Should you rotate to “quality” (an euphemism for large cap growth stocks)? If you turn on the TV or open a newspaper, you would be bombarded with advices to do some or all of the above. My recommendation is to do nothing and just stay the course. Anything you do at this time are more likely out of fear than out of reason. If you allow yourself to be driven by fear (and greed), then it is truly to your detriment.

Paraphrasing my pilot trainer, the turbulent market is not more dangerous. Don’t lose your cool and do something stupid. (You can start by stopping listening to the cacophony of market punditry.)

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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