Overcoming the flight or fight response to investment turmoil

When the financial markets suddenly go down some investors react by making poor decisions based on their emotional reaction. “Oh my gosh, the sky is falling and I need to get out while I can!” Other investors don’t let the day to day ups and downs get to them. Every wonder why?

So we had another market drop this past week (October 10, 2018). Notice I did not say biggest point drop – that is not accurate. Nor did I say biggest percentage drop – that is also not accurate.

I normally avoid sourcing Wikipedia for anything but I had trouble finding another source that had up to date data that showed the biggest one day gains, biggest one day losses AND the percentage of those changes.

Some interesting tidbits:

  • The point drop on October 10, 2018 was the third largest point drop on the chart.  “Oh my gosh!,” you say out loud.  Then you realize the first and second largest point drops were both in February 2018!
  • The percentage drop on October 10, 2018 was the 15th (out of 20) on the chart.  Wait what?  You said it was the third worst?  I did – In points.  As a percentage, the largest drop was in 2008 when the DJIA was around 8,500.  In 2018 the DJIA has been in around 23,000-25,000.
  • In Late 2008, there are five dates with the biggest drops in points AND five dates with the biggest gains in points.  For those who lived through that it was more intense than an old wooden roller coaster ride.
  • So far in 2018, there are seven dates with the biggest drops in points and four dates with the biggest gains in points.

So my point of this is that it is all relative.  You can pick and choose data to fit the sensational headline you want.  Want to scare everyone – pick the data point that will cause the most emotional distress.  

I have always been aware of the emotional stages of finance.  You should know this too.  As you get on the roller coaster you start anticipating a great time.  There may be a little hesitation but as you start clinking up to the summit you feel the adrenaline kick in and you start feeling excited.  As you reach the top and look over you see the huge first drop and you start screaming and thinking will it even stop going down.  Then you hit the bottom and you are in a bit of a recovery mode thinking what the hell just happened.

In the day and age of emojis I found and updated version of the chart.

This is a chart of the DJIA from 1915 to 2018.  Look at the cycles in the chart.  Looks a lot like the Emoji chart presented earlier -right?

The grey vertical bars are periods where there were recessions in the United States.

Some interesting observations I noted:

  • From the Market high in March 1966, it took almost 30 years, until 1995, to get back to the 1966 market high.  NOTE – When I downloaded the chart I chose to have the data be Inflation Adjusted.
  • Since 1995 there have only been two periods of large point drops – 2002 and 2009.
  • As the DJIA point levels keep going up, individual daily fluctuations in points get more dramatic.  However, when you look at it as a percentage change measurement it brings things into perspective.

So I did some googling and came across a lot of information about the reasons humans do what they do when it comes to investing.  In my search I came across the term “behavioral finance.”  There is certainly no shortage of clinical study or opinion on this topic:

Vanguard – Behavioural Finance – Understanding how the mind can help or hinder investment success.

NBER – How Biases affect retirement savings.

American Retirement Association – What is Behavioral Finance and Why Do We Need It.

There are some common themes across all these sources.


Simply put this is the fact that humans can make mistakes in their thought process.  We think we have it right but we do not take into account our biases that influence us.  Common biases are:

  • Overconfidence.  Humans have a tendency to overestimate our own skills and abilities to predict outcomes.  We think we know we can predict the next market breakout.  We think we can predict the next market downturn.  We think we can control or influence the market (when in fact individual investors cannot).  
  • Admitting Mistakes.  No one likes to admit when they screw up.  The fancier term for this is ‘regret aversion.’  When you bought that stock and then six months later it is down 25% most will have a hard time admitting their error.  
  • Losing.  No one likes it.   You may even keep telling yourself that the stock will come back so you can at least recover your initial investment.  A more logical approach might be to sell the stock for a loss at the same time you sell some stocks that have gains, which will help offset the tax consequences of both sales.
  • Now versus Later.  The fancy term is ‘present bias.’  This is when people decide to take an immediate return even though they are sacrificing a better return in the future.  Numerous studies use the example of offering someone $100 now versus a guaranteed $120 a year later.  The majority will take the $100 now to satisfy their immediate need for gratification.  They do this even though if they waited they could achieve a 20% return on their investment.     
  • Confirming our decision. This is when we seek out information and data that supports our conclusion rather than seeking out information that challenge our conclusion.  People are easily attracted to sources that agree with what we believe. We have a tendency to avoid sources that might be a challenge to our beliefs.
  • Hindsight is always 20/20. Yeah right. There is a difference between looking back and learning from an event and looking back and convincing yourself you saw it coming.  You are so pumped by your intelligence that you convince yourself that you can predict the future by studying the past. While I can tell you what goes up may also come down I cannot tell you why or when with any great level of confidence.

So, you are thinking ‘Thanks Road2 for the clinical lessons in human tendencies but what does this really mean?’  I am glad you asked.  Here is how I try to avoid the emotional roller coaster of our investments.  Notice I said ‘try’ – I am far from perfect and what works for me might not work for you.

• Problem -Sensationalized headlines.  I used to religiously check on hourly and daily headlines about the investment markets. I had multiple apps that had notifications turned on. This resulted in an endless ‘ding ding’ (until I figured out how to silence them) on my iPhone. I would get in my car and listen to a radio show about the latest in the moment market headlines. When I got home, I would get on the computer to check on our net worth and investment performance.

Solution – Disconnect from the Apps and turn off the TV/Radio. I am not suggesting you go into auto pilot mode and silence all feedback. I did turn off more than 80% of the Apps I was using for notifications. I also started listening to a radio show that was focused more on why things were happening versus what was happening. Lastly, I limited my time on the computer after getting home from work (with the direct benefit of spending more time with family).

• Problem – Dwelling on the past. I used to get hung up on my mistakes. I would look back and go over the ‘shoulda, coulda, woulda’ arguments. I would get so involved in this I was essentially in what I called ‘analysis paralysis.’ I would run through too many scenarios trying to fully understand where the decision went wrong or how I could have done better.

Solution – I reflect on the past and limit my time reviewing what I could have done differently.  I do still find myself getting too involved in looking back. What helps me with this is that I actually set up the count down timer on my phone to sound the alarm when time is up. I do adjust the time counting down depending on the complexity of the review.

• Problem – Constantly looking at financials. We have used Quicken since 1995. We have 23 years of data that I can pull up in a matter of minutes. I would find myself downloading transactions and valuations every night. This led to stress on days when the markets were down. Instead of focusing on our long term plan I was consumed with the daily tribulations.

Solution – Stop looking so often.  I decided to stage this one so I would not go through withdrawals to quickly.  No one wants to suffer from FOMO.  I now only look at transactions and valuations once a week.  I plan to move that to once every two weeks, then monthly.   Not sure if I can go to only quarterly yet.  I am making progress but sometimes I cannot  resist.  Note for full disclosure – We do use an investment advisor so this may not be as easy to do if you invest and manage on your own.  

  • Problem – What’s the end game?  Before we hired our current investment advisor our game plan was only partially in place.  We have always been savers and investors.  We set up automatic transactions to put money into our retirement plans and taxable accounts.  We are not big spenders which also helped tremendously.  But looking back, we did not have a real and objective plan for our future.

   Solution – Come up with a game plan.  We first got with an attorney to draw up an estate plan.  That led us to a review and purchase of term life insurance policies for both of us.  That led us to our decision to work with our current investment advisor.  That led us to working on a realistic financial forecast all the way until we leave this great Earth.  Sure we paid for the attorney and we pay ongoing fees for our investment advisor, but that has brought us peace  of mind.

  • Problem –  Comparisons will eat you up.  I was finding that I was comparing myself to others to often.  The Patel’s down the street got a shiny new BMW.  Did you see that new boat the Smith’s got?  Bob was telling me that his new stock was up 25% in six months.  


Solution – Why I don’t care anymore. Go read my prior post about why I stopped caring about what others bought or did.  Don’t get me wrong, we love our friends and family.  We just don’t care about their earthly possessions.

I hope this might help you think of some new ways to manage the daily ups and downs of the financial world.

What do you do to avoid the flight or fight reaction to the market roller coaster?

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