Steve Wendel, head of behavioural sciences at Morningstar, chatted with markets editor Jeremy Glaser to come up with some ideas on how to keep your cool when the market isn't. The entire interaction can be seen here. Below are the takeaways.
Understand that volatility, downward or upward, is just data.
Avoid looking at your portfolio on a daily basis, specially when there is tremendous volatility. There's lots of research on how frequently checking your portfolio, especially during market downturns, can warp one's behaviour and get you into trouble.
Remember that our minds play tricks on us.
If the market drops, that's past. That's gone. There's nothing we can do about it. It's really as we think forward to what will happen that our minds take that data and apply a story.
If you don't know what that story is, it's probably the bias of recency bias--thinking that what just happened is about to happen. But when we think about that rationally, we of course know that's not the case.
One of the things that we can do is to round out that story: This just happened; this is what I believe is about to happen; what's the rightful thing to do? For most professional, thoughtful investors, they know it means you look for bargains. Same exact data. Very different outcome.
Externalize so you can make calm and thoughtful decisions.
There are a variety of ways you can do that. Basically, think of ways that you can slow yourself down from making hasty decisions.
Intentionally look for friction. Set a rule for yourself, such as, I'm going to have a 3-day waiting period before I make any change. Or, if you are working with an adviser, tell him or her that they should only make a trade if you and your spouse are there.
Write out the rules you want to follow, such as, only if the market drops by X percentage in a particular amount of time. And then you're checking those rules again and again rather than checking your portfolio and making up the story about how bad things are going to happen.
Look at the emotional power of your investment policy statement. Look at what you wrote for yourself--or if you haven't already written one, of course, you should do that. Write out not just what your financial goals are but why you care. What matters to you and how that expresses who you are. Then, in times of trouble, you look back at that and say, fundamentally what I care about, what I value, has it changed? Probably not. It's a counterpoint to the vivid, crazy stories that can go in our heads when we see a market downturn.
Fight vivid with vivid.
We get these vivid images of a market crash, etc., but really it's only one of the things that we can pay attention to. Think about what this means for your goals. Probably not too much and especially in a 20-30 year horizon. What are the other things you have to do in your life? Play with your kids, help your family, do your job, etc. So you balance that one vivid screaming thing over here with all the other things you have to do in your life. It can help put things back in perspective.
