By Tim Conlin

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“The most important quality for an investor is temperament, not intellect.”

This statement from Warren Buffett becomes particularly apt as the uncertainty surrounding tariffs and double-digit declines in major indexes, such as the S&P 500 and Nasdaq composite, is causing some investors to question their commitment to long-term investing.

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However, in times of market turmoil, investors must recognize that our primal stress responses — such as literal tunnel vision — once crucial for survival on the savannah, now narrow our focus to immediate concerns, clouding judgment and hindering the critical thinking necessary to achieve long-term goals.

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So, how can investors hone their temperament, navigate market volatility and act based on reason rather than emotion?

Are you a trader or an investor?

First, it’s crucial to determine whether you are engaging with the markets as an investor or a trader because each role demands distinct costs and psychological mindsets for success.

Traders aim to outsmart others by timing markets and seizing short-term opportunities for quick profits. They are comfortable with risk and highly confident in their ability to succeed, even when making investments with limited information. However, unless you possess a unique skill or talent, making bets on the market will not lead to long-term wealth accumulation.

Conversely, investors achieve success not by fixating on daily price fluctuations, but by maintaining a long-term perspective and investing in great businesses that adapt to challenging market conditions, innovate and thrive over time. Essentially, investors participate in long arcs of progress backed by human ingenuity that withstand the test of time.

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Acknowledging that you may have a trader temperament and recognizing that this is not the most effective approach to successful wealth planning may prompt you to pause before making risky investment decisions.

The best days follow the worst days

Having a highly triggered fight-or-flight response can prompt you to sell out of your positions when markets become rocky.

As an investor, understanding key market data can strengthen your psychological resilience during periods of market stress. According to a study by J.P. Morgan, seven of the stock market’s best days over the past 20 years occurred within just 15 days of one of the market’s 10 worst days. This means that the market’s worst days and best days are clustered together.

The implications of missing the best days are startling. If an investor misses just the 10 best-performing days, they would have received only a 5.7 per cent average annualized return compared to 9.9 per cent for those who didn’t try to time the markets.

This stark contrast highlights why having the right psychological mindset during times of market volatility can significantly impact whether someone meets their financial goals or falls short of them.

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How investors can benefit from decision journalling

Before deciding to invest in the markets, investors should, ideally with the guidance of an adviser, write down their reasons for investing, the associated risks and how these investments fit into their overall financial plan.

When done correctly, decision journalling can provide a solid framework for staying true to long-term beliefs without being swayed by short-term market volatility.

Investors aiming to achieve returns that outpace inflation and grow their wealth over the long term by investing in equities must understand and accept the risk of volatility. Since 1950, the S&P 500 has experienced an average drop of five per cent nearly twice a year, a 10 per cent correction every two years and a 20 per cent decline every three years.

When market downturns inevitably occur, investors can reflect on their decision journal to remind themselves of the core principles behind their initial investment decisions and acknowledge that they accepted these risks from the outset.

This practice can help investors avoid psychological biases such as confirmation bias, recency bias and herd mentality, allowing them to maintain objectivity and see the bigger picture.

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For example, during the 2008-2009 financial crisis, some investors capitulated when markets collapsed, hoping to preserve their assets. However, over the following decade, we saw one of the greatest bull markets in U.S. stock market history.

An investor who exited the market out of fear and turned to guaranteed investment certificates would have missed out on returns that could have made a significant difference to their long-term financial goals.

Create a financial safety net

Because emotions tend to run high during major life stressors, such as job loss or divorce, you should also be cautious about making rash investment decisions. Consider assessing your spending needs for the next few years and establishing a financial safety net to support you through the transition. You won’t need to sell at a loss to cover necessary expenses, allowing you to adhere to your long-term investment strategy.

Our ancestors survived threats by narrowing their focus, but you’ll thrive by thinking broadly and staying the course.

Tim Conlin, CPA, CA, CFA, is a portfolio manager and investment adviser at Richardson Wealth Ltd.

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