Over the past few weeks we have all become familiar with the term “flatten the curve” as it pertains to COVID-19. This term is broadly used within personal finance as well. What if you could flatten your emotional curve?
As humans, we are bundles of emotions. One of the oldest evolutionary parts of our brain, the limbic cortex, is where our “fight or flight” response originates. This part of the brain has no speech, it just acts. In times of upheaval this part of the brain is put to work. The problem is, it can’t reason.
Health & Wealth
The past few weeks have witnessed an upheaval of almost every part of life throughout the globe. We don’t know what tomorrow might bring. We have anxiety about both health and wealth and most of what we read is either erroneous or hysterical.
Risk Cannot Be Eliminated
In terms of the wealth part, investors are coming to grips with the 4th (or 5th if you count December 2018) bear market of the 21st Century. This is broadly speaking about what should be expected based on market history dating back to 1926. Perhaps the best lesson that we have learned in the current time is that while risk can be managed, it cannot be eliminated. Risk is part of the fiber of the investment markets. We can’t prevent risk but we can control how we react.
A large part of being a successful investor is understanding that the shorter the time frame, the wider the number of possibilities. The stock market might be up tomorrow and down the next day and this isn’t caused by anything in particular. Markets price in new information each day.
Trust Your Intuition?
What about our intuition? Nobel laureate Daniel Kahneman says that “we trust our intuitions even when they’re wrong.” Intuition is based largely on experience, but our experience within the investing realm isn’t “regular enough”, as Kahenman says, for us to master the rules. Therefore, while we may have confidence in our intuition this may well be false confidence.
Intuition is closely linked to risk aversion at least in the way we experience market declines. Research by Kahneman and others show that market declines have about 2 times the emotional weight as gains. As one of my mentors used to say, “the downside hurts more than the upside helps.”
Flattenting the Emotional Curve
Flattening your emotional curve starts with maintaining a broad view and understanding that decisions aren’t made in isolation. Uncertainty shrinks your field of vision making it difficult to think about years into the future. Day to day market gyrations evoke a whirlwind of emotions which understandably make taking a broad view difficult. Just during this past month, the S&P 500 has seen a couple of the worst days in the modern era and a few of the best, including the best 3 consecutive days since 1931. Take the long view and don’t fall into the trap of trying to find causal relationships for short-term market volatility.
Finally, avoid big regret. Dr. Kahneman says “regret is probably the greatest enemy of good decision making in personal finance.” The higher the level of regret, the greater the opportunity for making bad financial choices. Start there. Ready for a real conversation?