Have you ever overreacted in your life? Ever made an emotional decision in response to a negative event that adversely affected you that was really hard to recover from?
Yes? Me too.
Human beings tend to respond to negative events via fight, flight, or freeze responses. This happens with financial decisions all the time, and its costs can be significant.
Don’t get me wrong: emotional responses to undesirable incidents aren’t always negative. You might be the kind of investor that when market goes on a massive dip you fight it and start buying the dips. Good for you. Easier said than done though.
It’s hard to be the kind of investor that gets greedy when others are scared. It’s much easier to be one that follows the crowd and flees with everyone else when the ticker tape and your monthly statement tanks.
The problem with the flight response is that not only have you made the decision to get out you likely will need to make a future decision of when to get back in. This can create a freeze response where you just keep watching the market go back up-and-up not knowing when or how to get back in.
Look at the COVID crash of 2020. A year-ago-today before coronavirus, the DOW peaked at 29,551.42 and proceeded to fall sharply and swiftly.
What do you do when your money falls 37% in just over a month’s time? Your $100,000 becomes $73,000 or your $1,000,000 is reduced to $730,000. It’s completely normal to feel fear and insecurity, but to act on it and sell everything can be damaging because not only did you lose a lot of money on the way down as it heads back up you get stuck on deciding when to get back in. When the market falls fast in March it’s easy to think it will just keep falling and even when it when it finally begins to climb back up in April it’s normal to remain convinced that it will just head right back down again. See? Stuck. Frozen.
As of the chart above indicates, the lows of March 2020 have now gone all the way up past the highs of last February. Up to the tune of 6% higher. This is just one moment in time and markets can go any direction, but it’s a good reminder that fight, flight, and freeze is a real thing in investing.
And there is another “F”. Recently I heard a therapist unrelated to the investment world mention fawning as a fourth response. We see this all the time in the wealth management world. Investors and headlines fawning over the-next-big-thing like Gamestop or whatever is hot-in-the-moment hoping to strike it rich. We can fawn over fear too. Some of us are wired to consume bad news like candy burying our gold bars and dollar bills in the backyard.
The key with all these reactions is to recognize that you are a human being and set guardrails in place to deal with these responses in a measured (instead of reactive) way. One way to do this is to consider having a financial professional help you. That might be us. Whether you pursue outside investment advice or not, just remember that all of us are human and sometimes we need to step back and remember our limitations and tendencies—our humanness—and its effects on our financial lives.