“Coronavirus tanks the markets. Get out now!”
“Gas prices at an all-time low. Buy!”
“The world is afraid of another Donald Trump Presidency. Sell!!”
The worst part about this is that people often act on these recommendations. People are always looking for ways to either earn a premium, or more frequently, avoid loss of principal. And for that reason, comments like these that are broadcast on CNBC or published in the Wall Street Journal have a tremendous impact on those who are exposed to it. It never ends; yet, for every person that gets it right, there are significantly more who swing and miss….badly.
Why is this so easy to fall prey to?
There are a number of reasons we find ourselves getting distracted by the noise.
One of the primary factors that explains how otherwise very smart people find themselves moving to cash – simply from the commentary of a news anchor or because of an article they read – is what is referred to as narrative bias. Narrative bias occurs because our mind is trained to attach itself to a plausible narrative. That is, most people will believe a majority of what they are told, simply because it makes sense to them.
The most dangerous noise to you, personally, is that which comes with a story that you are most likely to believe. Risk averse people are overly-susceptible to acting on the “Coronavirus health crisis” narrative. And Donald Trump opponents are far more at risk for falling for the “Donald Trump is going to lead to a recession” narrative. Generating fear draws attention.
Another reason is simply the volume of exposure – between social media and the news, you can’t always avoid the chatter. Their job is to get your attention. Creating fear gets attention. And that fear often leads to an emotional response. While it is difficult to resist, the most important step to eliminating rash behavior is to understand why it occurs in the first place.
So how can you protect yourself?
Prepare ahead of time by having a plan in place. And then have faith in that plan. If you’re one of our clients, you know that each year in our plan updates we have a conversation about risk tolerance and the risk/reward tradeoff that comes with your targeted asset allocation. We remind you what that looks like in the case of a market downturn. We also remind you that this is a part of the market cycle and that corrections/bear markets/recessions are expected. It’s all happened before. It will all happen again. Trust your planning and stay focused on the long-term.
Have someone to talk to. Feeling nervous? That’s okay! With things like, “the largest one-day drop since 2008!” being tossed around, it’s hard not to feel that way. But before you act on those fears, call your advisor. That is why we are here! To have a conversation, answer your questions, assuage your fears, and remind you that we have planned for this to happen.
Understand where you may be vulnerable. This can help you prevent yourself from making real mistakes. We must be careful not to reduce our understanding of the stock market to one single event. In reality, the market acts in response to hundreds, or even thousands of events simultaneously. Trying to explain or predict its behavior as a result of one, or even a few factors, is setting yourself up for investment failure.
Acknowledge your limitations. And know that one of those limitations is timing the market. No one knows exactly what/when/where/how will happen to the market because of Coronavirus. Or an election. Or any other event. And as a result, we shouldn’t base our buy and sell decisions on such. There is a reason your average investor earns below average market returns — they act on emotion. Instead, take a disciplined, long-term approach to managing your portfolio. Be mindful of the narratives. Instead of reacting and making potentially costly decisions, make a deliberate effort to stay disciplined.
Good Reads to Calm the Nerves
I know when I get nervous about something, I like to do some research and gain a better understanding of that topic. If you’re in the same boat, here are some good articles to read:
The Stock Market Is Tanking. Do Nothing.
Stock Market Crash 2020: Everything You Need to Know
6 Things to Do in a Bear Market
The Correction is Here But Disruption is Transitory
7 Tips to Stay Calm During a Stock Market Crash
The 10 Worst Places To Get Investing Advice
And if you’re still feeling nervous after this, give us a call. We’re always happy to have a conversation.
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