As we have endured another roller coaster trading day in the stock market, we want to again offer some thoughts. But we will not barrage you with more statistics, measurements, nor platitudes. Rather, following are some brief observations regarding human response characteristics that may be helpful to understand in these times of stress.
Behavioral scientists have studied extensively how, as human beings, our hard-wired emotions respond regarding financial information. It is a case study in what not to do and can help explain the anxiety, discomfort, and outright fear many may be experiencing.
- When financial news/outcomes are positive, the prefrontal cortex portion of the brain is active and responding. This is the same part that is active and responsive in addictive behaviors. In other words, financial success naturally triggers feelings of wanting more of the same. But going a step further, studies suggest this then leads people to believe that they know best how to keep that feeling going… common sense can become secondary and the brain tells us we know exactly what we are doing to chase after more of a good thing. This can cause markets to become “irrationally exuberant” as Fed Chair Alan Greenspan once commented.
- Contrast that with negative financial news/outcomes. In this case, the portion of the brain that is active and responsive is the hypothalamus, a pea-sized area, but one with an oversize effect. The hypothalamus responds to keep our body functions regulated and our body safe — and in doing so triggers the ancient “fight or flight” syndrome. In studies, when this is activated due to negative financial events, our bodies are automatically signaled to “do something to save yourself!” In other words, act. While this would have been helpful when fleeing a predator, it can work against good financial decisions when security prices fall.
So, while we and financial experts of all stripes are striving to provide information that urges you not to overreact, it may well be that your brain and your instincts are pushing you to act to diminish a profound sense of unease. Surely this time is different, and “getting out” is the right course. While as financial professionals we know that not to be the case, we also know how hard “staying the course” can be.
We hope that the facts above may provide a little more patience and fortitude — it is the right thing. Broadly diversified stock portfolios have always recovered from similar declines in the past and gone on to higher highs. Please reach out to us with any questions or concerns.