While in the midst of biting my nails over the election result, a friend said:
‘Watching the results coming in was like putting our books and magazines down to concentrate when the plane takes off.’
As if the power of our minds could somehow help the pilot get the bird up in the air.
My friend decided it was all too much. She needed to detach. She needed to accept the outcome was beyond her control.
Chastened, I looked at myself sitting in a nest of devices. Refreshing my feeds like a burns patient on a morphine drip.
Unshaven, short of sleep, exerting no control whatsoever…
What had I become?
This isn’t me
I manage stock market alarmism by checking my portfolio about as often as King George III heard from the colonies.
Why was I trying to deal with election stress by reading about every ballot drop in US counties I didn’t even know existed until last week?
The difference lies in my understanding of the rules of the game.
The Investor has rightly called out stock market
analysts astrologers who invent a new story to explain every fit and cough of the market.
Those ‘insights’ are typically about as useful as reading the omens for victory from the flight of swallows.
The value added is clear: the analyst is a performance artist, the media is an impresario, and the audience is entertained.
What it’s not is useful information, except for reminding me that no quantity of BS helps.
The election analysis was different. The Red Mirage effect helped me understand why Trump’s early 700,000 vote lead in Pennsylvania was not game over.
But my ape brain was still easily rattled by every plot twist.
I was deeply emotionally invested in the outcome because I believe this election had more riding on it than any other in my lifetime. The risk of the world superpower sliding into authoritarianism is not one I take lightly.
Then I found the election quants.
Digging beneath the headlines, these people crunched the numbers and properly contextualised the state of the race. Their sober-minded reports – as informed and agenda-free as any I could find – helped me through the critical hours.
This doesn’t work in the markets
As a small everyday saver I cannot tap into an equivalent real-time resource during a stock market crisis.
I do believe that some players can beat the market. They usually reinforce incredible skill with banks of PhDs, super-computers, and machine-learning algorithms.
- They don’t need my money.
- They don’t share their knowledge with the internet.
- Their process does not rely on transparency.
This is a very different environment to the election.
I can’t expect to navigate a market meltdown in the company of a friendly insider.
Stress management in this domain depends on fortifying my mind in advance.
I need to recognise my psychological enemies so I can reflexively avoid them, or shoot them down as they spawn like videogame baddies.
By cultivating the right behaviours and keeping the faith when all hell breaks loose, you can pull through with minor cuts and bruises…
Let’s divide up the risks we need to manage as a small investor as we navigate a drama in the markets.
Overconfidence – Loading up my portfolio with too much risk after a market run-up leaves me thinking I’m the King Midas of investing.
Dealing with it – Adopt a more conservative asset allocation than I think I need. Read about risk tolerance. Read about stock market history and the worst that’s happened.
Chasing returns – Over-concentrating my portfolio into crowded trades is like boarding the gravy train after it has left the station. Think buying crypto after the internet has run rampant with stories of Bitcoin millionaires, or getting into gold after it jumps 20% in price.
Dealing with it – Other than not doing it, I must abide by strong rules of thumb to deal with the temptation. No more than 5% of the portfolio can go into any alternative asset class. No more than I can afford to lose if I must invest in the hot new thing.
Pennies in front of steamrollers – Some trades make you feel like you’ve joined the big leagues, but they can backfire spectacularly. Trading on margin, spread betting, contracts for difference, inverse leveraged ETFs – high-risk investing can be as intoxicating as driving a Formula One car. Right up until you smash into the pit wall.
Dealing with it – Don’t trade in things you don’t fully understand. If you’re on an app that feels as exciting as a casino, then it is a casino.
Panicking – Your portfolio is down 30% or worse. Everyone is freaked out. The herd stampedes. In the media, the End Of The World Is Nigh. You sell. But somehow… the market rallies? Yes, while you’re on the sidelines in cash. Loss crystallized. But in an alternative universe, you snooze through the whole thing and are absolutely fine.
Dealing with it – Just don’t do it. Do not sell. The only plug you should pull is the one connecting you to the panic. Get off the internet. Do not look at your portfolio. Recite your safe word. Read your stock market history again. As long as we’re not losing World War 3 or in the throes of Communist Revolution, then a recovery will (eventually) follow.
Traumatised – You’re in your shell, licking your wounds, counting what’s left of your cash. You’re afraid to return to the market. Too shell-shocked to revisit the scene. The market marches on. Your portfolio slowly falls behind like a once-great country that’s lost its way.
Dealing with it – This is the place we never want to be. It may be too late to restore your shattered confidence, and rational advice is probably misplaced. But if there is a light that can intrude upon the gloom, it is this: there is no better time to invest than when the market is cheap.
Paying high-fees – Costs are guaranteed, returns are not.
Dealing with it – Invest in the cheapest index trackers you can, and avoid someone else trousering your profit.
Constantly changing the plan – Financial engineering changes more often than the fundamentals. City marketing departments fire new magic bullets at us every day: ‘The old way of doing things is dead, only our sexy new product can make you rich.’
Dealing with it – Don’t fall for the sales pitch. Have faith in your plan when it’s built on evidence. (A paper from a fund manager is not evidence. It’s marketing.)
Doom-casting – Projecting some negative trend into a huge wall shadow of fear. You know the sort of thing – the hard left will confiscate our pensions, ballooning debt will destroy fiat currency, and so on.
Dealing with it – Recognise you probably didn’t worry like this until you had something to lose. Success can breed irrational dread of change to the status quo. Franklin D. Roosevelt’s memorable phrase – “the only thing we have to fear is…fear itself” – is a useful piece of wisdom to lean upon.
Comparing yourself to an impossible ideal – Investing-wise, this foible might manifest itself as regularly checking in on an investment you once owned and sold, like you do with an ex on Facebook. (And then being consumed with regret if it thrives without you.)
Dealing with it – Don’t look back. Don’t beat yourself up. Get used to humble pie. The market makes us all eat plenty of it.
No-risk, guaranteed returns – The surest sign of a scam. Or at the very least small print laced with booby traps that will blow up in your face, sooner or later.
Dealing with it – Run away! Head for the hills! But never forget how easy it is to fall for the dream when you’re desperate.
The overwhelming complexity of the markets is an environment that few of us are equipped to navigate by instinct.
Our intuitions and gut reactions help us deal with short-term challenges that we’ve experienced many times before.
Barking dogs. Stormy conditions on the drive home.
But investing is a long-term game that confronts us with situations we have very rarely if ever confronted.
We struggle to calculate the odds, can’t cope with the unpredictability, and draw poor conclusions from scant evidence.
That’s why, for me, stress management in this alien place is about:
- Straitjacketing my emotions with evidence.
- Favouring inaction over action – especially when my blood is up.
- Planning what I’m going to do ahead of doing anything.
- Detaching from events like I’m floating in space.
How do you manage your stress? What psychological pitfalls do you think we face as investors and how do you deal with them?
Let us know in the comments below.
Take it steady,