Charles Rotblut has a nice article in the American Association of Individual Investors Journal (AAII) entitled “Investing Strategies For An Irrational Brain.” He illustrates the many ways our emotions push us to make irrational decisions. Then he gives several techniques that help investors avoid these behavioral mistakes and become better investors. The final method he recommends is both simple and powerful:
Find Ways to Slow Down
It may seem paradoxical given Wall Street’s focus on speed, but slowing down can lead to higher investment returns. When decisions are made quickly, the brain relies on System 1. Since System 1 is quick and intuitive, it does not fully analyze the potential outcomes of the action about to be taken. Slowing down increases the odds of invoking the brain’s System 2 and making more thoughtful decisions.
Slowing down can also reduce the emotional component of investing. When feeling stressed or excited, impose a mandatory 15-minute pause before trading. During that period, go for a walk, meditate, take deep breaths or even just watch funny videos—anything to get your mind off what is tugging at your emotions at the exact moment. Then, when you are feeling calmer, sit down and decide the best course of action. Even if you are not feeling nervous, merely taking a few deep breaths and then carefully reviewing your order can reduce errors.
The markets are inherently volatile but we should not be. We should have taken the time to craft a brilliant investment strategy and then we should be willing to give it the necessary time to perform as expected.
Studies have found that people who don’t watch the news are happier. I would like to say that investors who don’t watch the daily financial noise are probably richer. Or as one advisor suggested, if you must watch the financial news, at least watch it muted. The financial news pushes an urgent and troubling agenda to keep you watching for the latest things you “must” know, causing investors to engage in emotional trading.
But all the best financial wisdom is on the side of removing emotion from the investing process, slowing down, and doing nothing rather than making a big mistake.
John Bogle recommends, “Don’t do something. Just stand there.” And if you won’t do nothing then don’t peek in the first place. The crowd is usually wrong. When they are selling, it may be best to do the opposite of Wall Street consensus. Others suggest we just sit tight, stay in the markets, and stay the course in scary markets.
If you must do something, I recommend simply writing your fears on paper along with whatever actions you are tempted to take. Then remind yourself to review those fears and potential mistakes six months later. You can implement this idea by putting these thoughts on your future calendar, in a to-do reminder with a future due date, or by sending yourself a delayed email to be sent later. When you receive the reminder, imagine that you had acted on your fears. Most of the time you will be glad you did not.
Long-term investing does not require making quick emotional responses.
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