“the only thing we have to fear is fear itself”
~Franklin D Roosevelt
Do you remember what you were doing 10 years ago at this time? I’ve asked a couple of people and they vaguely remember – working at x company, getting laid off, etc… The younger the person, the less they can specifically identify where they were. I remember very vividly the turmoil in the financial markets and the overall economy – Lehman had just declared bankruptcy and employees were walking down the streets with boxes filled with their personal belongings.
It was a sobering kind of hell as both housing market started a massive correction while the leverage in the banks came to roost. In retrospect, two black swan events happening concurrently.
Whether you have vivid recollections of these days gone bye or have an arms-length experience, just about everyone I’ve spoken and worked with has had an indelible mental scar made on them by these events. Very similar to the scars held by the generation that lived through the great depression. The impacts of the Great Depression didn’t end with that generation. These scars were passed down to the subsequent generation and have formed their outlook on the financial markets for their entire lifetime.
This has a formal name in the study of emotional behavior. It is called “Anchoring.” People tend to project past experience into the future when asked to forecast future developments.
If we are asked to estimate something we cannot know for certain, we tend to look for an anchor value as a starting point. If you ask someone, who lived through the stock market crash of 1929 and the great depression that followed, to complete the following sentence: “It’s not IF the stock market will crash,……” they will immediately say, “…. it’s when the stock market will crash.” They have an anchor.; the one set back in 1929. A similar anchor has been set in many people’s minds by the events that occurred in 2008 and 2009.
The danger of these anchors is that they preclude someone from effectively evaluating current events. In many cases the root cause that set the original anchor is not applicable, is outright wrong, or has been solved in the current environment. However, the weight of the anchor still holds people captive and susceptible to fear. Fear in the brain, causes humans to avoid getting hurt – it’s how we are wired – the fight or flight response discovered by Walter Cannon in the early 1900s. This built in safety mechanism may have saved us from getting eaten by a predator, but it can also cause humans from making the wrong decision in investing.
Is it coincidental that FDR cited and spoke to fear in his 1932 inaugural address?
Realizing how events in our past can anchor a belief system and impact future behavior, what do we do? First, realize the more unemotional and fact-based an investor is in analyzing the market, the more likely one will be able to identify turning points. This may be hard, if not impossible for an individual to do for himself. An outside viewpoint may be necessary. The key is being able to hear what the outside viewpoint is saying.
Secondly, realize that people, companies, and the media understand what fear does to people. The may exploit this in an effort to serve their own self interest, make money off of people in a fear state, and sensationalize events unnecessarily.
And finally, relax. It is simple to say but hard to do. Develop a system to look at your goals and supporting investments in an unbiased systematic method. Understand the risks and expectations of your strategy at time when you are not in a fear-induced emotional state. When you are in flight or fight state, your rational perspective becomes inoperable – realize this. Find a resource that can help you through these emotional states.
For clients, if you would like to discuss this topic further and how and why your portfolio is positioned at the current time, please contact us to schedule a time to discuss your particular situation.
If you are not a client and would like to talk about your situation with us, please call our office to set up a time and we will explore your goals and investments with you.
If you would like to take a short behavior biases questionnaire, click here. You may be interested in the questions and answers.
Sources & Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All investing involves risk including loss of principal. No strategy, including rebalancing and diversification, assures success or protects against loss.