Surviving the Stock Market: Taming Your Inner Caveman

When it comes to investing and, well, life in general, behavior matters.  If you exercise bad behavior in your everyday life, you are likely to get an unacceptable result.  The same is true of investing.

For example, if you invest in nothing but the best stocks and mutual funds but behave poorly when they inevitably go down in value, you will likely get a poor result.  Conversely, if you own nothing but mediocre stocks and mutual funds, but exercise good behavior, you are more likely to get an acceptable result.

The problem with exercising good investment behavior is that our brains are not wired to be good investors.  Our caveman brains are wired for survival and therefore engage in “fight or flight” decision making.  If our ancestors were to encounter a perceived danger, like a sabretooth tiger for example, they knew it would be wise to run.

With the knowledge that our caveman brains are wired to run when presented with danger, it becomes clear that, for many of us, our brains are not evolved to the point where we can handle investment danger with equanimity.

So, what’s an investor to do?  Here are a few simple steps you can take to gain control of the caveman within:

• Know thyself.  When I studied for my Chartered Market Technician designation, we learned about investor bias and behavior.  Step one to dealing with how our brains are wired is to simply be aware of our hardwiring.  Think things through.  Understand how you react to different stressors and know how you may sabotage your own investment success.  Know in advance that there will be days your investments drop in value.  Sometimes by a lot! Remember that, when they drop in value, there will be scary headlines about the stock market, economy or geopolitical events.  Plan out how you will respond to those instances.  Perhaps the best plan is to do nothing.
  
  
• Seek help.  I realize this sounds self-serving, but hiring a professional financial advisor may help.  Why?  You have an emotional attachment to your money.  That attachment can cause your caveman brain to make bad decisions when the market comes at you like a sabretooth tiger.  Your financial advisor does not share the same emotional attachment to your money.  Therefore, he or she should be able to remain objective during periods of market stress and help you to behave appropriately.  
  
  
  
  
• Educate yourself.  Warren Buffett put it this way: “The best investment you can make is to invest in yourself.”  Learn about prudent investment strategies that can help you to stop sabotaging your investment decisions. 
  
  
• Define your risk tolerance.  Most advisors have tools to determine the amount of volatility you can tolerate.  These tools measure things like risk tolerance, risk capacity, temperament, and time horizon.  Once your risk tolerance is defined, an investment strategy that matches what you can tolerate and live with can be designed.  If the strategy is designed correctly, when the inevitable market decline happens, the volatility should be within your predefined comfort zone. The result?  There may be no need to change anything.  

These four simple steps may be the ticket to improving your behavior.  Our team is trained in using these tools and advising people on how and where to invest.  If you need help, feel free to give us a call.