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Scary Markets and Financial Stress


 

"The average long-term experience in investing is never surprising, but the short-term experience is always surprising."


-Charles Ellis

 

I'm reading on the couch in my home office when I see a kid in a suit walking up the driveway. Bingo the office dog starts going crazy - which actually helps me because it gives me a convenient excuse to not talk to unsolicited visitors.


It turns out he just started working for a high-cost mutual fund sales company that disguises their salespeople as financial advisors (I won't name the company, but their initials are EJ). The kid, quite obviously using a script, starts asking me questions about myself under the guise of trying to get to know me:


Kid: So, what do you do for a living, Eric? (no, I didn't correct him)


Derek: I work with people to help them with their emotions and behaviors around money.


Kid: Cool. I like to think I do that, too.


Derek: I'm not so sure. It seems to me the extent of your emotional work is promoting fear in order to sell mutual funds.


Kid: I don't think so, but let me ask you, Eric; there are a lot of people who are afraid right now because of the markets, including many of your neighbors. Tell me, when was the last time someone did a downside volatility analysis of your portfolio to make sure you won't go broke if this outbreak spreads and shuts down the economy?


Derek: (laughing) Sorry, I can't have this conversation.


----


Every time the stock markets give us negative returns we can count on the media (and financial salespeople) to make it seem like it's the end of the world. It's the bad news that sells, and it's the bad news that moves products.


Let's put some perspective on what to do when we see scary markets. What I hope to show you is that the day-to-day market movements (and even year-to-year) are like the leaves on a tree; they'll blow around in the wind very easily. If you focus on the movement of the leaves and branches you'll freak out. If you can change your focus to the trunk of the tree, representing your life, you'll see that the wind doesn't have nearly the impact as you originally thought.


financial plan is the trunk of the tree

Why We Get Afraid When Stocks Fall


We're all a little bit weird when it comes to money. There is nothing like money in nature, so this money stuff is quite new. Our brains are instead wired for survival. When we don't have money, or think we won't have money, our brains kick into survival mode.


Survival mode simply means that our rational brains are kicked offline, and we are making decisions that are very short-term and not likely in our best interest. Our subconscious mind, or animal brain, doesn't know about the future - it only knows about trying to get out of the current situation.


Survival mode comes in three flavors - fight, flight, and freeze.


Fight Mode


In nature, fight mode is exactly what it sounds like. If you startle a bear (whose cub is nearby), for example, it's likely to engage in fight mode. It will attack you. It fights. With humans, when we're in fight mode we can get into physical or verbal fights. When it comes to money, this can be getting angry and blaming others about our financial troubles. This helps put our minds at ease by letting us avoid taking responsibility for what happened. We might blame it on a politician, an illness, or anything else. Someone did something that we didn't have control of and now we're mad, and making financial decisions when we're mad isn't productive.


Flight Mode


Like fight, flight mode in nature is pretty intuitive. This is when you startle an animal and it immediately runs away. Humans run away, too. In an episode of Seinfeld, the character George senses a fire and instinctively runs away, knocking over old ladies and throwing kids out of his way. This is flight mode. With our money, flight mode means getting as far away from the source of stress as possible. You can see this by people selling out of their stocks after they've fallen and then never go back into the stock market again. Selling at a loss and not participating in subsequent rising markets isn't a recipe for success.


Freeze Mode