Current investors have seen more ‘interesting times’, more black swans and market freefalls, than any other generation gone before.
From the 2008 global financial crisis, followed by the longest bull run in history, to Brexit, several downgrades for South Africa and then the COVID-19 pandemic, today’s investors have run the gamut. Their emotions have run the gamut too, whether they realise it or not.
Our brains on investing
Like being chased by a lion or falling in love, our management of money produces very specific chemical reactions in the brain that are as primal as they are underappreciated. Take a look at how CNBC describes it:
“In his book, “Your Money & Your Brain,” journalist Jason Zweig explains that financial losses are processed in the same part of the brain that responds to mortal danger. As investors see their investment portfolios plunge, our amygdala kicks into high gear. The amygdala plays a crucial role in processing and steering our emotions, such as fear and anger, allowing us to respond quickly to dangerous situations. The ongoing communication between the amygdala and rational input given by the prefrontal cortex can be stunted in times of emotional threat, such as a financial loss. This communication disruption is also known as the amygdala hijack, and, essentially, the prefrontal cortex is disabled, preventing us from making sound, rational decisions.”
First, become aware of the problem
What’s interesting about investment is that, unlike a lion attack or falling in love, almost everyone thinks that they’re not being emotional. Not understanding the basic ‘trading psychology’ as it’s known behind the amygdala hijack lends it power.
We all know the age-old adage of ‘buy low and sell high.’ Never is that more applicable than in market carnage such as that caused by COVID-19 and the 2008 financial crisis. To sell during a bad time, could be to take the biggest loss and miss the biggest opportunity in modern investment history. And we know this, logically, we do. So why do so many people sell anyway?
Because to sell is, for the amygdala, to escape the ‘lion’. It just wants to get out – it doesn’t care that such an emotional move could cost us our retirement.
But if one is aware of the problem, of the trading psychology behind our amygdala screaming at us to sell, it becomes a little easier to emotionally distance ourselves from the decisions.
Emotionally distance
One of the challenges that we all face is overcoming the powerful impulses to escape the lion.
We need to remind ourselves firmly that our emotional urges are not us.
And they are not sacrosanct, we can choose to obey them or ignore them.
Language helps a lot. Instead of thinking ‘I am freaking out’, think rather ‘my brain is freaking out.’ An investor who knows trading psychology thinks: ‘my brain is short-circuiting because of what it perceives as a dire situation’. An investor doesn’t think: ‘I need to get out.’
Also, look for inspiration. Keep a quote by Warren Buffett next to your desk when you do your day-trading, or whatever it might be. Thinking with the wisdom of others, even if it is by proxy, distances yourself from the tunnel vision which is so easy in a moment of panic, which tricks us into thinking that the way a problem appears to us is the only way to look at it. For example, to look at COVID-19 or Brexit stock market crashes as a disaster rather than an opportunity.
Don’t aim for being a robot
The aim here is not to suppress all emotions until you have none as an investor. Completely emotionless investing, as most experts will tell you, is a myth. Feel the fear, but don’t let it master you. Emotions are important, but we need to be able to deal with them in a positive manner.
Get help
Good, solid financial advice is invaluable – especially in tough times when emotional reactions are likely. Seek out a financial advisor who understands volatility and let their experiences work for you.
Ensuring that you don’t make any investment decisions or portfolio changes without your adviser’s input is also a handy way to not act in the spur of the moment. You may wake up at four in the morning worrying about your retirement, convinced that you need to dump all your equities immediately, but in the cold light of day such kneejerk reactions might look very, very different.
Ultimately, it’s you and not your emotions that are in charge when it comes to managing your money. Keep that in mind and you’ll be able to weather the storm ahead.