If I asked you to hold your breath or stop blinking, how long could you do it? A minute, maybe two?
Now, what if I asked how long you could go without being moved by the latest headline news? Impeachment unrest, Hong Kong protests, Brexit stress, climate change, inverted bond yields, the price of oil … you name it. There’s plenty to think about these days.
I often counsel our clients on how current events may shape the actions they’d like to take in their larger life. But topsy-turvy yield curves and all, nothing we’ve seen at AMDG Financial lately has altered our strategic recommendations on how to pursue your personal investment goals while managing the risks involved.
If you are one of our clients, you may be blinking back tears of boredom by now for every time we’ve repeated the importance of sticking with your globally diversified investment portfolio.
Still, even though you know you should try to remain calm in the face of breaking news, it’s also worth remembering that doing so is not easy. It is not simply a matter of mind over matter. In fact, your mind is the very organ most likely to trick you into losing your resolve.
I can suggest some other tricks to help you stay on course as well. First, having a written investment plan can help guide you through volatile markets. Your plan (ideally created when markets are calm) should outline how you’ll handle ups and downs in the market. When things get rough, you can pull out your plan, re-read it, and reassure yourself that your plan still applies. To me, it’s like waking up the next morning after having nightmares and realizing that in the daylight, nothing is as bad as it seemed in the middle of the night.
It also helps to study the evidence. A recent blog from Dimensional Fund Advisors compares market returns across the 2000s and 2010s to explain how diversifying and pursuing the known drivers of higher expected returns can make a difference in your portfolio.
When the markets are in turmoil, you may also consider NOT checking your portfolio. Research has shown that the more investors check their portfolios, the greater their likelihood of trading, and it makes sense. As this article from Betterment asserts, checking on your investments often could make you more risk-averse than you need to be for the length of time you’re investing. It can also increase your risk of chasing performance, which, as I showed in a previous blog, is a losing proposition.
You may assume taking deep breaths for survival, versus doing so to maintain your investment stamina, are two entirely different challenges. After all, the first one involves a life-preserving reflex. The second one involves … actually, the exact same thing. Whenever you watch markets digest a never-ending feed of the latest, not-always-greatest news, similar reflexes are happening deep down in your head.
In his excellent book, “The Behavioral Investor,” psychologist Daniel Crosby explains:
“Emotional centers of the brain that helped guide primitive behavior like avoiding attack are now shown by brain scans to be involved in processing information about financial risks. These brain areas are found in mammals the world over and are blunt instruments designed for quick reaction, not precise thinking.”
Case in point. A recent study found, when negative returns were presented in red instead of in a neutral black (e.g., –12.8 instead of –12.8), study participants were significantly more likely to be more pessimistic about what future markets had in store. Two exceptions included participants who were color blind, or from cultures where red is associated with good fortune!
Unless you think color alone should drive your investment decisions, remember that your existing, well-reasoned portfolio remains your best friend for helping your big, biased brain look past the news of the day. To keep your investments intact and on course … just keep breathing. And, as always, let us know how we can help.