AI Financial Advice For Turbulent Stock Markets

Following a recent market selloff driven by renewed trade tensions, we turned to an unconventional source for perspective, asking ChatGPT a straightforward question: “How to Stay Calm In The Stock Market?”

The response was both insightful and humorous, offering valuable advice for navigating today's volatile markets. Let's delve into the AI's wisdom and expand upon its key points.

The Emotional Pitfall of Investing

As active managers, we've always emphasized a dual approach: focus on long-term goals while actively managing short-term risks. This strategy—which includes taking profits, rebalancing, and sometimes holding cash—is designed to help investors survive downturns without making emotionally-driven mistakes. The biggest challenge for any investor is their own emotions. As the legendary trader Jesse Livermore noted:

“The speculator’s deadly enemies are: ignorance, greed, fear and hope. All the statute books in the world and all the rule books on all the Exchanges of the earth cannot eliminate these from the human animal….”

Allowing emotions to dictate your investment strategy is a proven recipe for disaster. The most successful investors adhere to a strict discipline and risk management plan, a fact underscored by data from Dalbar showing how emotional mistakes lead to underperformance over time.

An investor's job is to objectively assess whether the market is driven by greed or fear and manage risk accordingly. Your long-term returns depend on it.

What ChatGPT Says About Market Volatility

ChatGPT perfectly captures the emotional struggle investors face:

“Let’s face it—investing is hard. The stock market is known for testing our nerves at the worst possible moments. One minute, everything is soaring, and the next, your portfolio looks like a bad game of limbo. It’s easy to panic when headlines scream “MARKETS IN TURMOIL!”... The truth is, there’s always a reason not to invest—rising interest rates, geopolitical tensions, valuations that look lofty, or warnings from billionaires... Instead of obsessing over every market dip or gloomy prediction, take a deep breath and remind yourself: volatility is part of the game. The best way to stay calm is to zoom out.”

This is a crucial point. There is always a compelling reason not to invest, a concept explored in Ted Seides's post, “The Hardest Day To Invest Is Always Today.” Fear sells news and generates clicks, but reacting emotionally is rarely a profitable strategy. As Peter Lynch famously said, “Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves.”

Practical Tips for Taming Market Madness

When volatility spikes, the best move is often no move at all. During sharp, unexpected market events, the initial emotional response is to sell. However, the optimal time to de-risk is usually before the event, not during the panic. ChatGPT offered some refreshingly practical—and humorous—advice on this front:

“When markets get choppy, our instinct is often to react. But most of the time, doing less is actually better. Here are some strategies to keep calm and carry on:”

• Distract Yourself: Instead of doomscrolling financial news, organize a closet, walk the dog, or do anything that keeps you from making impulsive trades.
• Remember the Market Has Mood Swings: The market can be irrational and moody. Trying to reason with it in the short term is often futile.
• Indulge in Comfort Food: Sometimes, a slice of pizza can do more for your state of mind than staring at red numbers on a screen.
• Avoid the Drama: Sensationalist headlines are designed for clicks, not to benefit your portfolio. Tune out the noise and focus on your long-term plan.

The Power of Long-Term Perspective

It’s vital to remember that market corrections are normal. Intra-year drops of 5-10% happen almost every year. Despite significant corrections in 2022 (27%), 2023 (10%), and 2024 (9%), the market is still substantially higher today. Bull markets can hide investment mistakes, but bear markets expose them.

As ChatGPT noted, checking your portfolio constantly only creates stress and encourages poor decisions. A short-term dip doesn't derail a decades-long financial plan. If anxiety is high, it's okay to turn off the financial news and apps. Stepping away can provide the clarity needed to stay focused on your goals.

The Unemotional Investor's Advantage

While losing money is never fun, it's important to find perspective and learn from mistakes. We are all human. The key is to separate emotions from financial decisions. As investment manager Howard Marks explained:

“Almost all the great investors I know are unemotional. If you’re emotional then you’ll buy at the top when everybody is euphoric and prices are high. Also, you’ll sell at the bottom when everybody is depressed and prices are low... Unemotionalism is one of the most important criteria for being a successful investor.”

This unemotional, often contrarian, approach is what separates successful investors from the crowd. When the market dips, ask yourself if your long-term strategy is still sound. If the answer is yes, then the best course of action is often to stay invested, ignore the noise, and trust the process.

Ultimately, your calm and your perspective are your greatest assets in an unpredictable market.