Is “It” Your Downfall or Your Victory?
So your stocks are taking a bath in this downturn market. What are you going to do about it? Well, if you’re like most people you’re going to worry, you’re going to second guess yourself, you’re going to see if possibly there is something better out there to buy, you might consider gold, or you may even go to cash.
There are basically two types of investors out there - those who get it, and those who don’t. I’ll get to what “it” is in a moment, but for now let’s understand why it matters if you get “it”. Those who get it tend to sleep better because they don’t worry about their investments as much. Those who get it tend not to second guess themselves when it comes to the investments they’ve made. Those who get it tend not to seek out the next hot stock or try to time the market. Those who get it tend not to flee to gold, cash, or some other commodity every time the stock market makes a bee-line downward. The road to future misery is paved with the torments and regrets of investors without “it”. Don’t become another research statistic who bought low and sold high. Don’t become another research opportunity for a finance PhD to study because you tried to time the buying opportunity for that hot tech stock that everyone else seemed to pick long before the price sky-rocketed to all-time highs, but only for you to see plummet after the purchase. Don’t become another toady who buys the hot stock because your friend/colleague/relative told you how much they had made on the stock and convinced you that it has tremendous potential for growth and nowhere to go but up.
I’ve seen it a hundred times; you think this will be the one. The investment that will finally pay off and I’ll make a killing because Jim Cramer on CNBC said so. Well, in good times when the market is rising it’s hard not to make a mistake because a rising tide lifts all boats. The problem is that when the tide goes out, some boats are a lot closer to shore than others and boats don’t do well on land. Besides, Jim Cramer is a glue-sniffing imp always telling us that he's "Building model airplanes," well, I'm not buying it. He'll sneak into your house once, and that's all it takes. The next thing you know, there's money missing off the dresser and your daughter's knocked up...but I digress.
Here’s what “it” is. “It”, is knowing that the stock market is going to go up and it’s going to go down. We make money in the good times only if we buy during the down times. Our natural reflex when the stock market goes down is to flee to safety. We can’t help that reflex because its been ingrained into our DNA for millions of years and is part of the oldest system in our brain – the Limbic system. This system with its various components such as the amygdala, several gyri, and other cortexes supply us with a variety of reactions - most notably, the fight-or-flight response. Millions of years ago, this vital part of our brain kept us from being eaten by Sabre-tooth Tigers, but today, it acts on our fear of loss and what that might mean for our future survival (i.e. will I be able to afford dinner tomorrow if my stocks lose value?) Luckily for humans, we have developed a newer part of our brain known as the neo-cortex. This “new” brain has the ability for us to think rationally and to overcome the knee-jerk reactions of the limbic system. Only problem is that the neo-cortex takes longer and expends much more energy to engage, and our brain doesn’t like to expend energy and resources if it doesn’t have to, hence why we make knee-jerk reactions – they’re easier.
And now the caveat. One of the best ways to keep the limbic system from driving you off the financial cliff is to have an advisor. Someone who you contact before you click the sell button and alter your financial state of being. Someone who can help talk your limbic brain off the ledge and help you to engage your rational thinking neo-cortex. Because the truth is that while stocks rise and fall, the best bet is to stay invested. All the research shows this despite what your ancient brain has to say.
Don’t worry that your stocks are dropping, stay invested, buy more while they are on sale, and for goodness sakes don’t let your emotions over take your rationality.