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Train Your Brain to Handle Market Uncertainty

Why emotional coping is an essential skill for long-term investors.


Elections, inflation, high-profile layoffs, climate emergencies, civil unrest, and rising interest rates—all of these forces put pressure on markets and lead to uncertainty about the future.

Uncertainty is stressful. In fact, humans have been shown to prefer even physical pain to the stress of uncertainty.

As an investor, learning how to cope emotionally with this uncertainty—and how to avoid making rash investment decisions that you might regret—is one of the best investment skills you can develop.

Avoid Doomsday Narratives

Regardless of your political persuasion, you’ve likely been told that “the other guy” represents an existential threat to your life, liberty, or pursuit of happiness. Climate disasters are becoming more frequent and more deadly. Social unrest is rising around the world. Civilian violence is now so commonplace as to no longer be shocking.

The new normal is fundamentally more volatile than what we are comfortable with. As investors, we can respond to this increase in uncertainty by trying to control the world around us (spoiler alert: we can’t), or we can develop the mental strength to focus our attention in more productive ways like assessing our diversification strategy, looking for hidden opportunities, and taking advantage of tax incentives.

Beware of Short-Term Thinking

The first step in bracing for uncertainty is to recognize the real existential threat to your finances: short-term thinking. We have a natural tendency to discount the value of things that are far off in time, which we call present bias or delay-discounting. Decades of research show us that this tendency to discount the future is linked to:

Fear and uncertainty can make even the best planners myopic or nearsighted. End-of-the-world narratives feed a short-term mindset. It’s hard to plan for a 20-year time horizon when you see only chaos up ahead.

If it isn’t a looming recession, it’s inflation, unemployment, or interest rates. There will always be things for the pundits to scare us with. To maintain your cool as a long-term investor, you simply must find ways to see past the immediate crises. We can do this by turning our attention away from the uncertainty of things we can’t control and toward things that are certain and things we can control.

Confront Uncertainty With Diversification

One of the things we have control over is our diversification strategy. If you are holding a portfolio that is heavily overweight in one sector or asset class, you may want to ask yourself some questions about how that came to be the case. I’d wager that emotion is involved somewhere. What does this overweighting tell you about your true appetite for risk and reward, and how can you use this information to help you make decisions going forward?

Holding a large percentage of your assets in just a few stocks or sectors is an extremely risky play regardless of the political, economic, or social climate. Likewise, sitting on too much cash means missed opportunities for growth. If your portfolio is underdiversified, you risk losing, but not because of politics or business cycles. Consider talking with a financial advisor who can help you create a portfolio that suits both your temperament and your financial goals.

For now, feel free to utilize our guide on how to build a diversified portfolio.

Search for Opportunities

Whenever the market has an extreme reaction to world events, you can turn it into an opportunity. In the case of a market crash, you’ll have the chance to buy some great companies when they are selling at a discount. If there is a large upswing, you can sell some winners that have become overpriced. Buy value. Sell hype. Learn to recognize both.

The forces creating uncertainty around the globe are also driving innovation in businesses. Today’s businesses need to adapt to:

  • an economy that is undergoing global structural changes,
  • a natural-resources landscape that is experiencing shifts in weather patterns, and
  • a labor force made up of people who need to stay healthy and who increasingly demand equity and representation for all.

This means that there will be opportunities for innovation in areas like energy production and storage, agriculture, biomedical research and engineering, insurance, property management, and on and on. The opportunities are endless for businesses and investors who are thinking about the long term.

Be Patient and Use Coping Methods

You’ve likely heard about the famous “marshmallow experiment.” Researchers found that kids who had the self-control and patience to wait alone in a room with a marshmallow without eating it for an unspecified amount of time (not an easy task for a kid!) were the same kids who showed signs of greater success later in life.

My favorite detail about this study is that the kids who waited usually had some sort of coping method to help them. They would sing little songs, turn their toes into pianos, and find other ways to distract themselves. Subsequent research found that the kids’ socioeconomic environment was a significant factor in helping them to develop the coping strategies that supported their ability to wait. When you grow up in an unstable environment, it is more difficult to develop these coping skills. Your own background may have affected your current ability to wait out uncertainty. If so, you may need to retrain those mental habits to reap the benefits of patience.

We have more at stake than a marshmallow. In a very real way, people’s lives and livelihoods are on the line. However, the skills necessary to wait for a marshmallow are the same skills we need to employ as long-term investors.

The true lesson of the marshmallow experiment is that those who have healthy ways to cope with uncertainty are more likely to have positive long-term outcomes in many areas of their lives. So, let’s learn from those 4-year-olds and get busy with positive actions.

Reading the news and “doomscrolling” is like sniffing the marshmallow. It doesn’t help you cope because it increases the pain of waiting in uncertainty. Instead, invest that precious time and energy in something you know will give you a positive return.

  • Be present with your loved ones.
  • Speak kindly to your neighbors.
  • Take your anxiety out for a nature walk.
  • Sing. Meditate. Dance. Sleep.

Do what it takes to stay balanced in your thinking so that you will be mentally and emotionally ready to take advantage of the coming opportunities.

Editor’s note: A version of this article was previously published in 2020.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Sarah Newcomb

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Sarah Newcomb, Ph.D., is a behavioral economist for Morningstar. In this role, she works to integrate the findings of her research into Morningstar financial management applications and tools.

An interdisciplinary scholar, Newcomb has expertise in consumer psychology, economic decision-making, personal money management, and cognitive and social psychology. Before joining Morningstar in 2015, she earned her doctorate in behavioral economics from the University of Maine, where her work focused on the psychological barriers to sound personal money management. She is the author of LOADED: Money, Psychology, and How to Get Ahead without Leaving Your Values Behind (Wiley, 2016).

Newcomb also holds a bachelor’s degree in mathematics from Salem State University, a master’s degree in financial economics from University of Maine, and a master’s certification in personal financial planning from Bentley University.

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