Understanding Volatility and Emotions

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What You’ll Learn

• What volatility is and why it exists
• How to interpret market drops (they’re normal!)
• The psychology of investing and common emotional traps
• How to avoid panic selling (the #1 wealth killer)
• Techniques to stay calm during market crashes
• Why volatility creates buying opportunities
• How to build emotional resilience as an investor

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Why This Matters

• 📉 You’re afraid of seeing your money drop 20-40%
• 😰 You check your portfolio constantly and stress about every dip
• 🎢 The emotional roller coaster is exhausting
• 🤔 You don’t know if you should sell when market drops
• 💪 You want to be a calm, disciplined investor

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What Is Volatility?

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The Simple Definition

• Prices move slowly and steadily
• Small daily changes (0.1-0.5%)
• Example: Government bonds, savings accounts

• Prices swing wildly
• Large daily changes (2-10%+)
• Example: Individual stocks, crypto

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Measuring Volatility: Standard Deviation

• Average return: 10% per year
• Standard deviation: ~15%
• This means:
  • 68% of years: Return between -5% and +25% (10% ± 15%)
  • 95% of years: Return between -20% and +40% (10% ± 30%)

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Volatility Is NOT Risk (For Long-Term Investors)

• “Volatility = risk”
• “If it’s volatile, it’s risky”

• Volatility = short-term noise
• Risk = permanent loss of capital
• Stock market is volatile but NOT risky long-term

• Short-term: Market can drop 40% in a year (2008, 2020)
• Long-term: Market has never failed to recover and reach new highs
• 10+ year periods: S&P 500 has ALWAYS been positive

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Historical Market Volatility: What to Expect

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Normal Market Behavior

• 2023: -10%
• 2022: -24%
• 2021: -5%
• 2020: -34% (COVID)
• 2019: -7%
• 2018: -20%
• 2017: -3%
• 2016: -11%
• 2015: -12%
• 2014: -7%

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Bear Markets (20%+ Declines)

• Bear markets happen every 5-10 years
• Drops range from 20-60%
• Always recover (100% success rate)
• Recovery can take months to years
• New all-time highs always reached eventually

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The Longest Perspective: 100+ Years

• Great Depression (1929-1932)
• World War II (1941-1945)
• 1970s stagflation
• 1987 crash
• Dot-com bubble (2000-2002)
• 2008 financial crisis
• 2020 COVID crash
• 2022 inflation/rate hikes

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The Psychology of Investing

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Your Brain is Wired to Fail at Investing

• Immediate threats (tiger attacking)
• Short-term survival (find food today)
• Loss aversion (losing food = death)

• Long-term compounding (decades away)
• Abstract numbers on screens
• Delayed gratification (wait 30 years for millions)

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Cognitive Biases That Destroy Wealth

• Losses hurt 2x more than equivalent gains feel good
• Losing $100 feels worse than gaining$100 feels good

• Portfolio drops 10% → Panic! Must sell!
• Portfolio gains 10% → Meh, whatever
• You overreact to losses, underreact to gains

• Day 1: Portfolio drops from $10,000 to$9,000 (-10%)
• Your brain: “I LOST $1,000! SELL EVERYTHING!”
• Day 2: Market recovers to $10,000
• You already sold at $9,000 → Locked in loss

• Recent events feel more important than historical patterns
• “This time is different” thinking

• Market drops 20% in 2022 → “Stock market is dying, will never recover”
• Ignores 100 years of evidence that it always recovers
• Sell at bottom based on recent fear

• March 2020: COVID crash, market down 34%
• Your brain: “This is the end, economy is collapsing forever”
• Reality: Market fully recovered in 6 months, up 50% by end of year
• Those who sold in March 2020 missed the entire recovery

• Seeking information that confirms your existing beliefs
• Ignoring contradictory evidence

• Market dropping → You read only bearish articles
• “See, everyone agrees market will crash more!”
• You reinforce panic instead of seeing full picture

• You think housing market will crash
• You only read articles predicting crash
• You ignore data showing strong fundamentals
• You miss buying opportunity because confirmation bias

• Following the crowd
• “Everyone is selling, so I should too”

• Buy when everyone is buying (market tops)
• Sell when everyone is selling (market bottoms)
• Buy high, sell low = guaranteed losses

• 1999: Everyone buying tech stocks, market at all-time high
• You FOMO and buy at the top
• 2000-2002: Everyone panics and sells
• You sell at the bottom
• Lost 50% by following the herd

• Fixating on a specific price as “normal”
• Judging current price against that anchor

• Bought Apple at $175
• It drops to $150
• You won’t buy more because you’re “anchored” to $175
• “I’ll wait for it to get back to $175”
• It never goes back, goes to $200 instead
• You missed 33% gain from $150

• Bitcoin hit $69,000 in 2021
• You’re anchored to $69k as “normal”
• Won’t buy at $30,000 because "it's still down from$69k”
• Miss opportunity to buy at 56% discount

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The Emotional Cycle of Investing

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The Classic Investor Sentiment Cycle

        Euphoria
        "I'm rich!"
            ↓
        Thrill
       "This is easy!"
            ↓
        Excitement
       "I'm winning!"
            ↓
        Optimism  ← START: New investor buys in
      "Let's try this"
            ↓
      [MARKET PEAKS]
            ↓
        Anxiety
      "Uh oh, it's down"
            ↓
        Denial
      "It'll come back"
            ↓
        Fear
      "This is bad"
            ↓
        Desperation
      "Make it stop"
            ↓
        Panic  ← SELL: Investor panic sells at bottom
      "SELL EVERYTHING!"
            ↓
      [MARKET BOTTOMS]
            ↓
        Capitulation
      "I'm done with stocks"
            ↓
        Despondency
      "I'll never invest again"
            ↓
        Depression
      "I'm so stupid"
            ↓
        Hope
      "Wait, it's recovering?"
            ↓
        Relief
      "Okay, maybe it's not over"
            ↓
        Optimism
      "I should get back in"  ← BUY: Buys back in (higher than they sold!)
            ↓
      [Cycle repeats]

• Buy during optimism (near peak)
• Sell during panic (at bottom)
• Buy back during relief (higher than sold)
• Result: Buy high, sell low, repeat forever

• Stay emotionally flat
• Ignore the cycle
• Hold through all phases
• Or buy MORE during panic

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How to Handle Market Drops: The Playbook

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When Market Drops 5-10% (Happens Multiple Times Per Year)

• Normal volatility
• Could be news, earnings, Fed comments, or nothing
• Completely routine

• Nothing. Don’t even think about selling.
• Don’t check portfolio more than weekly
• Continue regular monthly investments

• ❌ Panic
• ❌ Sell anything
• ❌ Check portfolio every hour
• ❌ Read apocalyptic news articles

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When Market Drops 10-20% (Happens Every 1-2 Years)

• Market correction
• Healthy and normal
• Valuation reset

• Nothing. Hold all positions.
• Continue regular monthly investments
• If you have extra cash, consider buying more (stocks are on sale!)

• ❌ Sell anything
• ❌ Panic
• ❌ Try to “wait for bottom” before buying more

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When Market Drops 20-40% (Bear Market, Happens Every 5-10 Years)

• Bear market (official definition: 20%+ decline)
• Major event: recession, crisis, panic
• Scary headlines everywhere
• Everyone is panicking

• HOLD EVERYTHING.
• Do NOT sell a single share
• If you have extra cash, BUY MORE AGGRESSIVELY (best buying opportunity in years)
• Trust 100+ years of history (market always recovers)

• ❌ Sell to “preserve what’s left”
• ❌ Try to time the bottom
• ❌ Wait for recovery before getting back in
• ❌ Listen to doomsayers

• 2008 crisis: Market dropped 57%
• Scary headlines: “Capitalism is over”, “Another Great Depression”
• Those who sold: Lost half their money and missed recovery
• Those who held (or bought more): Recovered and made fortunes

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When Market Drops 40%+ (Rare, Happens Every 20-30 Years)

• Major crash (2008, 1987, 1929 level)
• Apocalyptic headlines
• Everyone thinks it’s “different this time”
• Maximum fear

• HOLD AND BUY MORE IF POSSIBLE
• This is generational buying opportunity
• Everything is on sale 40%+
• Load up on quality stocks and index funds

• ❌ Sell anything (worst possible time)
• ❌ Think “this time is different” (it never is)
• ❌ Wait for more clarity (you’ll miss the bottom)

• 1929: -89% drop, eventually recovered
• 1987: -34% in one day, recovered in 18 months
• 2008: -57% drop, recovered in 4 years
• 2020: -34% drop, recovered in 6 months

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Techniques to Stay Calm

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Technique #1: Don’t Check Your Portfolio Daily

• Market is down 60% of days
• Seeing red every day creates anxiety
• Daily movements are noise, not signal

• Check monthly or quarterly only
• Set it and forget it
• Judge performance yearly, not daily

• Daily: See -2%, +1%, -3%, +0.5%, -1% = Emotional roller coaster
• Yearly: See +10% = Calm and happy

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Technique #2: Focus on Time, Not Timing

• Stop trying to time the market (when to buy/sell)
• Start focusing on time IN the market (staying invested)

• Best 10 days: If you missed them over 20 years, return drops from 10% to 5%
• Those best days often come right after worst days
• Trying to time means you’ll miss the best days

• Buy and hold for decades
• Ignore daily/weekly/monthly noise
• Let time work for you

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Technique #3: Zoom Out (The Long View)

• Open a long-term S&P 500 chart (50+ years)
• See that every single dip recovered
• Realize current drop is invisible in long term

1970-2024 S&P 500 Chart:

[Steady upward line with barely visible dips]

You realize: That 30% drop you're panicking about?
It's a tiny blip on the 50-year chart.

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Technique #4: Math Over Emotion

• “I lost 20% of my money!”
• “It’s going to zero!”
• “I should sell before I lose more!”

• Started with $10,000
• Now worth $8,000
• If market returns to normal (+25% from here), you’re back to $10,000
• If you hold for 5 more years at 10% average, you’ll have $16,000

• Has the economy collapsed? (No)
• Are companies still making products? (Yes)
• Will people still buy iPhones, use Google, drink Coca-Cola in 10 years? (Yes)
• Then why would you sell?

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Technique #5: Dollar-Cost Average Through Volatility

• Invest the same amount every month regardless of price
• When market is down, you buy more shares
• When market is up, you buy fewer shares
• Average cost smooths out volatility

• Average cost: $382
• Current price: $420
• You’re up 10% because you bought during the dip!

• Market drops = opportunity to buy more shares
• You’re EXCITED about drops, not fearful

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Technique #6: Have a Written Plan

My Investment Plan:

1. I will invest $X per month in VOO for 30 years.
2. I will NOT sell during market drops.
3. If market drops 20%+, I will buy MORE, not sell.
4. I will only check my portfolio quarterly.
5. I trust 100+ years of market history.

Signed: __________
Date: __________

• Reread your plan
• Follow it exactly
• Ignore emotions

• You made the plan when you were rational (not emotional)
• Emotions can’t override written commitment
• Removes decisions during stressful times

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Technique #7: Use Ape AI for Emotional Support

The market just dropped 15% and I'm panicking. Should I sell?
My portfolio is down from $10,000 to $8,500. What should I do?

• Remind you this is normal
• Show you historical data
• Walk you through why holding is right
• Calm you down with logic
• Prevent emotional mistake

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Why Volatility is Actually Your Friend

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Volatility Creates Buying Opportunities

• Most investors say they want “stocks on sale”
• But when market drops 30% (everything is on sale), they panic and sell

• Volatility = opportunity to buy quality assets at discount
• Without volatility, you’d never get good prices
• High prices = good for selling
• Low prices = good for buying

• Apple normally trades at $175
• Market crash: Apple drops to $130 (same company, same products)
• You can buy 35% more shares with same money
• When it recovers to $175, you made 35% gain

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Volatility is the Price of Admission

• Want 10% annual returns? (stocks)
• You must accept 20-40% volatility

• Want 0% volatility? (savings account)
• You get 0.5% returns (loses to inflation)

• High returns + low volatility doesn’t exist
• Choose: Accept volatility (get 10% returns) or avoid volatility (get 0.5% returns)

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Success Checklist

• ✅ Market drops 5-15% multiple times per year (normal)
• ✅ Bear markets (20-40% drops) happen every 5-10 years (normal)
• ✅ All crashes in history have recovered (100% success rate)
• ✅ Volatility is not risk (for long-term investors)
• ✅ Volatility creates buying opportunities

• ✅ I won’t check portfolio daily (monthly or quarterly only)
• ✅ I won’t panic sell during market drops
• ✅ I’ll hold through all volatility
• ✅ I’ll buy MORE during crashes (if I have cash)
• ✅ I’ll trust my written plan over my emotions

• ✅ I wrote an investment plan
• ✅ I understand my cognitive biases (loss aversion, recency bias, etc.)
• ✅ I’ll use dollar-cost averaging to smooth volatility
• ✅ I’ll zoom out to 10+ year perspective
• ✅ I’ll ask Sage when I’m panicking

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What’s Next?

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Continue Your Education

• Common Beginner Mistakes →
• Building Your Investment Philosophy →

• Your First $100 in ETFs →
• [Paper Trading: Practice Handling Volatility →](../Getting Started/paper-trading-practice)

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The Bottom Line

• ✅ Normal and expected (happens constantly)
• ✅ Temporary (always recovers)
• ✅ An opportunity (buy when others panic)
• ✅ The price of long-term returns (can’t avoid it)

• ❌ Tell you to sell during crashes (wrong)
• ❌ Make you think “this time is different” (wrong)
• ❌ Cause you to buy high and sell low (wealth destroyer)

• ✅ Hold through all volatility
• ✅ Buy more during major drops
• ✅ Don’t check portfolio daily
• ✅ Trust the math over feelings
• ✅ Follow written plan, not emotions