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What Happens to Our Investing Habits in Times of Turmoil

This is the opportune time to take notice of our financial habits.

Editor’s note: A version of this article first appeared in March 2020.

Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

These are unusual times. During times of disruption, our minds' habits can help or hurt us--both in our investing and in our daily lives. Let's take a look at what habits really are and how you can break free of the negative ones.

What Purpose Does a Financial Habit Serve? The term "habit" is used in many ways, but for researchers it has a specific and important meaning: Habits are automatic behaviors, triggered by our environments. Our minds are constantly looking for ways to automate common tasks, so we can free up our scarce mental resources to focus on other things. Any action we repeat again and again in a stable context may start being automated--and thereby turn into a habit.

Habits rely on a trigger: something that tells the body to act. The trigger can be a specific situation, such as: When you get to your office, you check to see what the stock market is doing. Or, the trigger can be a state of mind: When you wait in a line, you take out your phone. Habits are little mental programs that run automatically, freeing up our conscious mind to deal with more complex or novel problems. They are, by definition, nonconscious: Once they are automated, we don't think about them. When we see the trigger, we simply respond.

What to Expect When You're Expecting Strange Times What happens to our habits in times of turmoil? They're more malleable than you might think. Here's what to expect.

1) Expect to be tired. When our environments change--like when we begin working from home--our habit triggers are disrupted, too. Previously, we could rely on habits that controlled our eating, our daily schedule, and so on. But for many of us, the coronavirus has taken a rototiller to our daily lives and our habit triggers; now, our minds need to think through many more decisions than we're used to.

Above and beyond these unsettling times, the lack of our normal habits can make us feel even more unsettled and tire us out mentally. And unsettled and tired are not good states to be in when reviewing our investments.

2) Watch out for bad behavior. Even if you think a certain habit is "just for now," you are already forming new habits. Our habit system is constantly looking for patterns to automate. It's looking at how we spend our time and how we respond to events, and it's digging channels in our brains that make those behaviors easier and more likely to reoccur in the future.

That's great if we need to learn how to navigate having kids at home or how to video-conference effectively. It's not so great when we're obsessing over a bear market or the latest short squeeze.

What happens if, like us, you’ve started forming bad investing habits of constantly checking the news and market movements? Researchers have found that the more often people get information about the market, the more that information warps their behavior (in this case, by making them more risk-averse). If you are a long-term investor, watch out for a short-term habit of obsessive market-watching.

3) Turn the change in habits into an opportunity. Most of our spending behavior, for example, is habitual. We generally don't think about the things we buy regularly. And that can be a problem if we want to put aside more money for the future but find that we're always short on cash. Our financial habits can defeat our financial goals.

Because those habits are likely disrupted right now, you have an opportunity to revisit what you spend your money on, how much you save, and what you want to accomplish in the long run. Ironically, it is exactly during the times in which life is most disrupted that we have one of the best opportunities to plan for future normalcy. Researchers estimate that there is a window of time after periods of major disruption in which our new patterns start to jell. This is an active area of research, but the estimate is that we're especially prone to forming new habits within the first 90 days--shorter for often-repeated behaviors, longer for less frequently repeated ones.

What do you want your new normal to be? What new routines do you want to adopt in your investing and your spending?

By the way, while this article is focused on financial habits, the same applies for other habits in our lives, too. Exercise. Healthy eating. How we spend our time with our families. We’re creating the new normal right now. We’re creating our new habits. Choose wisely.

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

Steve Wendel

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Steve Wendel is head of behavioral science for Morningstar, where he leads a team of behavioral scientists and practitioners who conduct original research to help people invest and manage their money more effectively. Before assuming his current role in 2015, he was principal scientist for HelloWallet, a company that specializes in web and mobile financial wellness programs, where he studied savings behavior and coordinated the research efforts of HelloWallet’s advisory board. Morningstar owned HelloWallet from 2014 to 2017.

His latest book, Improving Employee Benefits, shows HR practitioners how they can use behavioral economics to help employees to take action on their benefits. In 2013, he published Designing for Behavior Change, which describes HelloWallet’s step-by-step approach to applying behavioral economics and psychology to product design.

Wendel holds a bachelor’s degree from the University of California, Berkeley, a master’s degree from The Johns Hopkins University School of Advanced International Studies, and a doctorate from the University of Maryland, where he analyzed the dynamics of behavioral change over time.

Wendel is also the founder of the Action Design Network, a nonprofit organization that teaches members how use behavioral economics and psychology in product design. The network hosts more than 5,000 behavioral practitioners at events around the country, including the annual Design for Action Conference. Follow Steve on Twitter: @sawendel

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