It’s pretty evident to anyone interested in their investments and their performance that the global markets are going through some pretty radical ups and downs these days. The resulting situation has certainly been, and continues to be, a roller coaster ride for many of us. To state the obvious, these are indeed challenging times.
How to Avoid Financial Neurosis
In an interesting article written by Barry Ritholz, Bloomberg Columnist and Chairman and CIO of Ritholtz Wealth Management, Mr. Ritholz quotes a colleague of his, Nick Maggiulli who explains that investors tend to ‘replay traumatic market moments in our head over and over again and they can come to define how we invest in the future.’
This can give rise to a helplessness cycle leading to dangerous and occasionally fatal emotional responses. What we’d like to point out in this blog is how we can all potentially avoid negative thoughts and not ruminate when volatile action in the financial markets cause us anxiety. Learning to recognize what’s in our control is a good first step.
Behavioural Finance
We’re interested in people’s behaviour when it comes to their investing and general financial habits. We continue to research this topic in order to help us (and you) better understand and anticipate any possible ‘financial neurosis’ that some investors may experience when world events, market volatility and investment performance appear to be going out of control. What can or can’t we control?
To illustrate, let’s consider the following few examples, distilled from a checklist helpfully provided by Mr. Ritholz, with our own observations added. It’s divided into two categories: what we cannot and what we can control.
What We Cannot Control
| Market moves | Will the next Star Wars movie be good? |
| Geopolitics | Gross domestic product |
| Corporate profits | Tariffs |
| Government interest-rate decisions | Middle East peace |
| Volatility | Home or retail sales |
| Inflation | Who wins the Stanley Cup |
| Bear & Bull Markets | Tweets from politicians or other influential figures |
What We Can control
| Developing an investment philosophy | Leverage |
| Asset allocation | The contents of your portfolio |
| Turnover of financial holdings | Having a long-term plan & sticking to it |
| Fees, commissions, capital gains taxes | Books you read |
| Quantity & quality of media consumed | How much risk you’re willing to assume |
| Understanding markets do go up & down | Your own behaviour |
| Your expectations, motivations & goals | Your emotional reaction to events |
Conclusion
That last item, your emotional reaction to events, is hugely important.
To illustrate with an example where emotional reactions need to be under control, just think about how the firefighters and other first responders operate when they enter a high stress or potentially dangerous situation. They’re trained to consider what might go wrong and to be prepared for any eventuality. As a result, when a negative event occurs, they’re not surprised by it and react with cool detachment.
We can behave in a similar way when it comes to events which affect our personal life too by making it our habit to be prepared for any eventuality and react in a calm and thoughtful manner.
Learning what you cannot control, and focusing on what you can control, is good advice – not only when it comes to investing but also in life.