Grow: This Is What Your Instincts Are Doing To Your Investment Strategy

Whether it’s binging on a pint of Cherry Garcia, texting your ex or—like many who freak out when the stock market dips—withdrawing money at the worst possible time, we all succumb to temptations that go against our better judgment.

Even though we intellectually understand that it doesn’t make sense to sell low and buy high, why do so many of us still fall prey to this mistake? And more important, how can we avoid gut reactions like these?

Your brain on fear

Brain chemistry plays a big role when people make poor decisions in emotionally charged situations. “When we become excited or fearful, our prefrontal cortex, which is used for logical thinking, shuts off,” says Certified Financial Planner Brad Klontz, PsyD, founder of the Financial Psychology Institute. “The amygdala—the primal, animal part of our brain—takes over.” Basically, it’s fight or flight mode, and our frame of reference narrows to focus on immediate survival, rather than long-term well-being.

To counteract this tendency, put a barrier between any harmful impulse and actually pulling the trigger, whether that means educating yourself on normal market cycles or engaging in a stress-relieving hobby. “An acute sense of panic doesn’t last long,” Klontz says. “Giving your amygdala a chance to calm down will allow the prefrontal cortex to re-engage and function properly.”

Avoid jumping on the bandwagon

Our herding instincts can also subvert our good intentions. “This is another survival mechanism,” Klontz says. “When we see others around us panicking—including on the news—we also panic.”

If you’re prone to this behavior, mute the talking heads. “As long as you have a solid, diversified financial plan, it’s better not to watch the news in a fluctuating market,” Klontz says.

Beware of biases

The frequency bias is a cognitive error that leads us to believe that the way things are now is how they’ll be forever. For example, “younger investors who’ve never experienced a downturn may assume that the market will always go up,” Klontz says.

To fight it, broaden your perspective. If you (or your parents) were investing through the 2008 crash, it’s worth looking at how stocks rebounded—and continued to climb—and reminding yourself that downturns are part of normal market cycles. “If you’re surprised, you’re likely to misread the situation as being an actual threat,” Klontz says.

It also helps to think about your holdings as three different buckets: one for stocks, bonds and cash. When stocks falter, remind yourself that’s simply part of your aggressive bucket. If you can sequester the loss to one specific area, it won’t seem as panic-inducing.

RECENT NEWS

Gyrostat Capital Management: The Missing Allocation In Retirement Portfolio Construction?

For decades, retirement portfolios have largely been constructed using combinations of growth assets a... Read more

When The Gate Comes Down

A Stress Test Rather Than a ScandalApollo Debt Solutions is not a blow-up story. It is something arguably more instructi... Read more

What If The Investment Industry Is Benchmarking The Wrong Things?

  Investment management is built around benchmarking.  Fund managers compare themselves a... Read more

SpaceX Is Looks To Make History

The Biggest Bet in Wall Street History: SpaceX's $1.78 Trillion IPOThere are moments in financial history that stop you ... Read more

Gyrostat June Market Outlook: When Low Volatility Conceals Structural Risk

This monthly Gyrostat Risk-Managed Market Outlook does not attempt to forecast market direc... Read more

Why Low Volatility Is Not The Same As Low Risk

Why Low Volatility is Not The Same As Low Risk Some of the worst-performing portfolios in... Read more