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Stress management

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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.

Crucially:

  • 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.

Pre-crisis

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

Mid-crisis

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. 

Post-crisis

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.

Long-term

Paying high-feesCosts 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. 

Impulse control

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,

The Accumulator

{ 9 comments… add one }
  • 1 David R November 10, 2020, 2:26 pm

    Lots of useful reflections and insights in this article.

    The only builds I would offer are:
    (1) for investors who are prepared to make a bit of an effort (who maybe enjoy this stuff) – I think it _is_ possible to find a small number of fund managers or teams that (i) have a decent track record of outperformance, relative to risk and volume of trading, (ii) have a credible narrative behind it, (iii) have fees that are a smallish fraction of their outperformance, and good governance, and (iv) seem very likely to continue outperforming (relative to risk). So it might be worth putting say 20-40% of that equities ‘tracker’ money into such investment trusts and funds. and reviewing it every year or so (not every week!).
    (2) choose your trackers with some care. A few years ago i reviewed the ones I had bought in to, mostly Vanguard but also a few others. I was surprised to find that some tracked fine but others seemed to steadily underperform their benchmark by 1-2-3% a year. Often within the same peer group. Which led me to have a look at what is underneath the bonnet of ETFs, eg synthetics and use of derivatives to replicate the tracked index. There are some sharp practices, hidden costs and hidden risks, which investors might want to avoid.

    But this is somewhat icing on the cake – and only for those who have the time energy and inclination. Buy and hold, largely in low cost trackers that do not slip much behind their indices, is the right thing for most retail investors saving for pensions, property upgrades, or whatever.

  • 2 AtlanticSpan November 10, 2020, 2:35 pm

    This article is worthy of a Pulitzer Prize, and as Vicky Pollard would say, I’m not even joking !

  • 3 cat793 November 10, 2020, 3:46 pm

    I love this. One of the best articles I have read on Monevator I think. Not just funny but also succinct. I have to run these verities through my mind regularly to keep me on the straight and narrow.

  • 4 Grff November 10, 2020, 4:12 pm

    I enjoyed that. Well done. Think I will check my stocks again for the nth time today.

  • 5 Victoria November 10, 2020, 4:38 pm

    I bought into my first S&S ISA in March this year. Odd timing but it took me 2 years to get up the courage. Reading blogs like yours is what gave me the confidence that it didn’t matter what the market was doing, I should be in it.

    Of course that’s now looking like the best decision I ever made, and even though I have read so many of your posts to prepare me, I’m not looking forward to the real world where my portfolio (sounds silly using that world for my little ISA) not only doesn’t rise so well, but actually loses money. Bookmarking this to come back to then!

  • 6 MrOptimistic November 12, 2020, 12:24 pm

    Reading Monevator is as good a stress buster as anything (excluding brexit natch). So thanks guys ☺

  • 7 The Accumulator November 12, 2020, 8:17 pm

    Aw, shucks. Thanks guys.

    @ Grff – chortle. Know what you mean.

  • 8 Matthew November 12, 2020, 10:54 pm

    I find that bigger problems like pain and grief help focus the mind. A delayed retirement wouldn’t really be a problem for me – work is healthy. I only invest because I have nothing better to do with it, no real plan, although I do believe that investing is morally more constructive for society than charity or paying tax

    So basically do not depend on the money, be flexible about the outcome.

    @TA – I hope the need to write monevator doesn’t drive you or TI active, otherwise you might be making an overall loss

  • 9 Hariseldon November 14, 2020, 11:29 am

    @David R

    Good point 2) I looked at some regional trackers and found that the lowest charges did not equate to better performance. Large ETFs from the likes of Vanguard , State Street and iShares have much merit.

    I think point 1) is doubtful over a period of time, some managers/ fund management companies do really well at some point of time and it looks easy to go with these companies, but 30+ years of watching the markets suggests that this is harder than it looks , styles come and go and a sound ,logical, reasoned approach that works in one period doesn’t work in another…

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