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Investors: You Can't Ignore Your Emotions, But You Can Sidestep Them

How to create friction on the path to rash market action.

I didn't get much sleep last night; I imagine you didn't, either. Or, if you went to bed early, you might not be so well rested in the coming days. The emotions I'm feeling, and you probably are as well, can't be ignored or squashed. But they don't have to destroy our investments.

Regardless of politics, I couldn't help thinking about the volatility that was already looming when I switched off the computer at midnight last night. What would it mean for my family as we dream of retiring early and giving ourselves to charity work? What should I do with our investments, and, with our dreams?

It's made me ask: Who am I as an investor?

Well, the facts are simple. I'm a behavioral scientist and a valuation-driven investor. And I can easily rattle off some of the behavioral biases at work at this moment:

  • Vividness bias. I can't help but fixate on dire market scenarios. What havoc would a trade war wreak?
  • Recency bias. I can't help but forecast how the midnight drop in the futures market could extend into a terrible rout over the coming days, weeks, or months.
  • Herding effect. I think of all the people around the world who might be rushing to safety, and anxiety starts to bubble under the skin.

Fixating, forecasting, feeling anxiety. It's not worth a darn that I'm a behavioral scientist--they still threaten to overtake me. As a valuation-driven investor, it's also easy to rattle off what this moment could mean as a profit opportunity, as Ben Graham's "Mr. Market" may scream out insane prices that a patient investor waits for. Doesn't help, either. It's too real, too immediate. Stark images keep taking over, about my family, and my ability to support our lives.

I know I can't simply ignore the turmoil--both inside and out. If I try to, there's a good chance that I'll make things worse. I know I can fight off the desire to panic now, and I can do it for a while to come. But eventually, if the market really does enter a rout, then I might waver. Our willpower is finite, and we all have our off moments. When things get really dark, I might finally decide that it's too much for me.

I'm sure you've heard stories of stalwart investors who made that fatal mistake--they thought they could ride out the storm, only to jump overboard at exactly the wrong moment. I'm not foolish enough to think I'm somehow magically smarter and stronger than all of them. Supporting my own ego isn't worth the financial risk.

So instead, I am "externalizing"--I'm focusing on how I can use reminders and other things outside of myself and my emotions to guide me. It's a common theme in behavioral science on how people can make better decisions. Right now, I'm:

  • Bringing up my "personal investing strategy" that I wrote for myself a while back. It's dull. It's systematic. It's exactly what I need. In other words, it's an external reminder of the calmer mindset I was in when I put my money in the market in the first place.
  • Reading over and over the commitment I made: I can't directly change my investments. I can't buy or sell. I can only follow my investing strategy or, after a cooling off period, change the strategy. My strategy's rules decide when to buy and sell. It's an external abstraction that insulates me from the rush to take action.
  • Adding friction to my path, including the requirement that my wife, Alexia, has to sign off on any sale.
  • Going into the office at Morningstar the next few days and talking to people about what this means for investing. They know I'm a valuation-driven investor (and many of them are as well), and I'm putting my credibility on the line, i.e., using the power of my community of investors to keep me on track.

At the moment, I don't have an advisor; if you do, that's another powerful way to externalize--creating friction on the path to rash action, and adding a calmer voice to remind you of your values and goals.

Each of these approaches to externalizing decision-making, and how they can make us do better in anxious, fearful times, has a body of research literature behind it. I know there's no guarantee that we'll make the right choices, even with these techniques. But from what I've seen, these approaches could help. So I'm using them myself, for my family, because what we care about is on the line.

The markets are just one part of the momentous changes that are occurring right now in the United States, and likely the world. But unlike world events, we have direct control over how we act in the markets, right now. We can't ignore our emotions. But we can side-step them, and find ways to create external reminders and rules, external frictions, and peer pressure to help us keep our heads. Good luck.