With the stock market regularly posting triple-digit swings and commodity prices jumping up and down, it's easy to understand why some investors are stressed out.
"There's a lot of volatility, emotionality and irrationality," observed Dr. Ari Kiev, a psychiatrist and author of "Mastering Trading Stress: Strategies for Maximizing Performance."
Though he focuses on how hedge fund traders handle stress, Kiev said the market's recent volatility can trigger the same emotional and physical issues for individual investors. "I think the human psychological underpinning of buying and selling stocks is pretty universal for both the amateur and the professional," he said. But when the stakes are personal, like a family's college or retirement fund that's losing value, the resulting stress may seem a bit different.
Assess your risk
One way to help reduce your investment-related anxiety is to understand your appetite for risk, and allocate your investments accordingly. A start might be taking an online quiz that helps assess risk tolerance. There are many available on the Web, including one at the Rutgers University personal finance site.
Several factors influence what kind of risk is appropriate, from your age to the particular goal involved: buying a home, sending one or more children to college, or preparing a comfortable retirement, for example.
"If you're a younger person, with a much longer time horizon, with much greater risk tolerance, markets like this give you an excellent opportunity to put more money to work," said Phil Orlando, chief equity market strategist at Federated Investors in New York City.
Make a plan
After deciding how much investment risk you are comfortable with, you should identify your goals and develop a plan to achieve them, said Orlando. If you're unable to develop that plan on your own, hire some help, he said. "Establish what your needs are, what your goals are, what your plans are, and the professionals will sit down and put together a program with an acceptable level of risk tolerance."
"You need to be well armed with an array of plans for all situations," agreed Don Montanaro, chief executive officer of TradeKing, a Boca Raton, Fla.-based online brokerage. "You need to spend time educating yourself so that you're prepared for all different types of markets."
Adhere to the plan
Even more important than making a plan is sticking with it.
"Under stress, people tend to not follow their strategy," noted Kiev. Just like professional traders trying to justify wrong decisions, individuals might try to hold on to stocks that have turned bad, take on extra risk to make up for losses or sell a winning investment before it has peaked in a move sparked by fear. "People hold on to losers because they don't want to admit they're wrong, they think things are going to get better," he said.
Build in safeguards
Montanaro said such stumbles, and the related stress, can be avoided by building entry-point and exit-point targets into an investing plan. "When you go into a trade, you have to have some idea of when you get out of a trade," he said. "At the moment you enter a trade, you should set that exit plan up."
The easiest way to do that is to set up a stop loss order with a brokerage when making a purchase. Such orders set the price at which you would automatically sell a stock when it declines to a certain level.
Montanaro said such built-in moves can help investors avoid getting emotionally involved in daily fluctuations. "You've got to stick to your rationale," he said. "If you find yourself rooting for or cheering for your stock as if it's a sports team, you have to step back."
Kiev echoed the thought. "When you're anxious and you're stressed, you tend to overreact," Kiev said. "That tends to escalate your anxiety and makes matters worse."
Manage your stress
Kiev recommends using stress-reduction techniques like meditation, yoga and visualization to help handle the feelings that can lead to emotional investing, and notes such methods are most effective when practiced regularly. "When you're in the middle of a stressful market," he said, "it's very hard at that moment to start applying these principles."
Seeking input from fellow investors, for instance in an online forum, can also help, said Montanaro. "Just because you have decided to become a self-directed investor and make your own decisions, you still shouldn't go it alone," he said. "Sometimes you can get so deep into your own analysis tunnel, that popping your head out into the sunshine is a great thing to give you some alternate perspectives on your view."