“Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” - Jason Zweig (Author and Wall Street Journal Columnist)
Investing affects people in variety of ways because everyone has unique character and personality traits, and experience. The uncertainty and volatility (ups and downs) of markets present a formidable mental and emotional challenge to even the most seasoned investors. It is important to realise that it is highly common for our emotions to become linked to peaks and troughs of markets given that it is our hard-earned money that is on the line! It is also extremely important to understand how market movements can create these changes in behaviour. Keeping a calm clear head can be difficult in times of extreme volatility, when the market moves abruptly, but it is necessary to maintain a clear course of action based on well-defined investment objectives.
Often, investment success is driven more about what you do not do rather than what you do. Trading activity, moving in and out of investments on whims, that is driven by emotional reactions to short term market movements can harm anyone’s portfolio. Fortunately, like the story of Odysseus, there are hacks you can put in place to avoid the sirens and ending up with an investment portfolio that resembles a shipwreck. 2020 provided a strong case for avoiding potentially destructive action. Below are the monthly returns from the global share market in Sterling. As can be seen from the below, had you panicked at the end of March and sold your investments, you could have potentially missed some of the best months of the year resulting in an inferior investment outcome. Indeed, April and May provided a strong rebound which helped secure a very good outcome of 12.3% for the year.
Source: Morningstar. The data reflects the return of MSCI World Net Return Index in Pound Sterling
We will give seven tools to keep your emotions in check, or at least partly, when market up and downs have you in a tailspin.
Do your research
Technology means that today we have a wealth of information available instantly at our fingertips. The importance of doing thorough and reasonable research prior to making any investment is paramount to success. Knowing the facts can strengthen your resolve and conviction and strengthen your ability to commit to a long-term solution that fits your goals. Importantly too, doing effective research can mitigate the chances of having to make costly changes down the line. The value of this cannot be underestimated. Time, and energy, can often be a constraint to understanding, so below are some common sense, yet powerful, areas to consider when looking at a provider.
- Fees: Understanding fees can be a daunting task but critical to investment success.
- Strategy: Is it clear how your money is being managed, and by whom?
- Communication: Does the provider communicate with investors and do you find it helpful and meaningful? How good is their customer service?
- Performance: We invest money to reap the rewards later down the line, so it always helps to see how prospective investments have performed, although there is no guarantee that they will perform in the same way in future periods.
Our 4W framework that we apply to fund research, can provide a general framework for any type of investing. We all understand that investing can be full of jargon and rather overwhelming. The truth is that it does not have to be that way. Important to this process, is taking your time, whether to ask questions or compare providers, as, once you decide, the next points are designed to make it difficult to change your chosen course.
Record your thoughts in a journal in times of market turbulence
While getting into any new habit can be difficult, the rewards of long-term consistency in carrying out a positive habit can be very powerful. Record your thoughts and emotions in those periods where you find yourself either too worried or excited about your investments. The key here is building a catalogue of your thoughts and emotions over time, for two reasons:
- It will help you shed potentially value destroying emotions.
- You can review what you felt and thought in prior, turbulent periods as a reference for how things may have stabilised as time passed. Bringing comfort to the idea that sometimes a patient approach can pay off!
This process will help build personal experience in how the ups and downs of markets tend to smooth over time, bringing with it a sense of peace and a long-term focus. Not only will the habit help you see clearly through the emotions created by market noise, but journaling has also been shown to many other benefits such as better sleep, stronger immune system, and a higher IQ. The best thing of all, it is one of the cheapest habits or hobbies around1!
Write a letter to yourself
When you make any investment, write out the reasons for the investment with all the carefully thought-out details of why you have decided to take on the investment. It is important here to match your actions with your objectives for the investment. This will create a strong bond between the goal and the action. You can also include reminders of some of the convincing reasons you have decided to make a long-term investment. These can be quotes such as:
‘Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t… pays it.’ – Albert Einstein
They can also be snippets of the attractive qualities of the investment that came up when you did your research. It’s a blank canvas so you can be creative and include anything that will help you stay on course. Importantly, make sure you consider your objectives and investment itself before making any changes to your plan.
Sleep on any decision
The process of sleeping on an important decision creates a barrier against making potentially damaging, impulsive actions. With a click of a button or even a voice commands your instantaneous feelings can create immediate actions. In the past and before all the tools built on the world wide web, people would have to write letters or plan to see someone to implement a decision. This would create a natural space for the emotions to cool off and sensical review of the matter at hand. There is an ancient Greek proverb that says, ‘Deliberate at night’ which we would say as ‘sleep on it’2.
Going through decision or situation at night, and then reviewing the conclusions and merits of the case with a fresh mind in the morning; when the emotional aspects have tempered; is a simple, yet powerful strategy to make better long-term decisions for your future.
Avoid checking your account too often if you can
One way to avoid ‘flip-flopping’, emotional decisions is to not put yourself in the position to feel the emotions too often. When markets are volatile checking your balance every day, sometimes multiple times a day can see your emotions synchronise with the rollercoaster ride of up, down, and sideways movement. It is important to remember that these short-term movements in markets are entirely random and looking at your account too regularly can create a perception that they are more important than they are.
“Nothing in life is as important as you think it is, while you are thinking about it” – Daniel Kahneman (Author and Nobel Prize Winner)
Instead of regularly checking the amount of your investments, set regular dates to review, annually if possible. Doing this will allow you to use time more efficiently. Instead of wasting time, say two minutes each day (over 11 hours a year!) looking at your balance, you can instead spend two hours a year and achieve much more. Half year and quarterly, or even monthly, may be a good place to start if you find longer periods more difficult.
Share your investing goals with someone you trust
“An accountability partner can create an immediate cost to inaction. We care deeply about what others think of us, and we do not want others to have a lesser opinion of us.”3
Above is a quote from James Clear’s book ‘Atomic Habits’, which is a great read for anyone looking to add small but powerful habits to their daily lives. Having someone to share your goals and emotions with is very important. It can be a partner, a parent, even a son or daughter. Following on from the above quote the closer the relationship the better, as we generally care more about the opinions of those that are closer to us. Also, this information is naturally sensitive, and it is better to share it with someone you can truly trust and has your best interests at heart. It is always a good idea in any case to have a soundboard for your own mind too, as we can often get tangled up in our own thoughts and emotions too easily, which can lead to bad decision making.
Avoid the noise
In the age of information, we are inundated with news, updates, and narratives. The power of social media platforms has amplified this constant information churn in our everyday lives, sometimes in sinister ways (i.e., fake news). Much of this information is designed to grab our attention by being sensationalist. News outlets must sell papers, but these days its more about ‘clicks’ that drive traffic to the hands of advertisers. News providers and stock market commentators must deliver stories on a daily or hourly basis. Think of the emotion that is elicited when seeing ‘Breaking News’ in a bright red banner across the screen… As consumers of this information, it is always important to remain aware of the motives behind any piece of information that is presented to you – to look through the noise so to speak. Incorrect information can lead to bad decision making and create emotions that are destructive. Like watching your nutritional diet, it is important to watch your information diet. Carefully selecting reputable news outlets with long histories of commitments to providing a balanced view is critical to seeing the world as it really is and not as others want it to be.
The above two tools will help you to see through the noise and provide important reminders of the ‘Why?’ behind every investment decision you make. Investing can be a mentally challenging pursuit, particularly when markets become turbulent, and fear strikes. Slowing things down, sticking to the facts and realising that over the long term a month, a year of volatility is just a bump in the road to greater success.
References
1: https://www.nytimes.com/2018/10/25/style/journaling-benefits.html
2: “Aristotle’s Way” by Professor Edith Hall
3: ‘Atomic Habits’ by James Clear
Past performance is not a reliable indicator of future results.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
You should seek financial advice if you are unsure about investing.
