Any good financial planner will tell you: Invest for the long term.
But can you – or anyone, really – ignore the short-term?
In case you didn’t realise, we’re officially back in a new bull Market...
The S&P 500 is up 20% from its December 22 closing low.
Stocks closed higher last week and rocketed again over the last few days.
The index is now up 12% year to date.
On Thursday, we finally got confirmation that the bear market ended in October and that we’ve been in a new bull market ever since.
Recent market moves have been far outside consensus expectations in a bullish way.
The most popular predictions about stocks going into 2023 have been very wrong.
But this blog isn't simply to highlight the fact that bearish market-timers were wrong (they were).
There's no denying it's incredibly difficult to predict short-term moves with any accuracy, even when you know where the fundamentals are headed.
And it can be particularly dangerous to make bearish moves in a stock market that usually goes up. You risk missing out on significant short-term gains, doing irreversible damage to your potential long-term returns.
Instead, I wanted to highlight the constant, deafening noise around this topic.
And when something is noisy, it’s hard not to be distracted.
That’s certainly true with our Money.
The rollercoaster ride of stock or bond market volatility often sets off our emotional triggers – a sophisticated way of saying we get nervous when they're on the downswing and angry when they're static.
However, it's important to acknowledge that nervousness, anxiety, and fear are natural human responses.
They've been ingrained in our evolutionary journey and though they may have some flaws, they serve a purpose.
Throughout the course of human evolution spanning the last 300,000 years, our brains have been finely tuned to detect danger. This mechanism has been crucial in keeping us alive. The fight-or-flight response is automatically activated when the brain perceives a threat, allowing us to react quickly.
This has served us well. Spotting a potential threat, like a lion staring right at you, can make you freeze in fear.
Unfortunately, this response has no off switch, it's part of who we are. That was true on the savanna, and it’s true in modern living.
That includes how we process and make hard decisions about capital markets.
Our emotional attachment to our hard-earned money is powerful. When we take risks, it’s a physical sensation as well as an emotional one.
A lion in the wild or red lines on a chart - both can cause fear.
What’s the natural response to a falling market? For many, it’s similar to seeing the lion. Our DNA tells us to get away from the threat as quickly as possible...but here's the problem.
While this makes sense when faced with a lion, in the case of long-term investment, it probably doesn't.
Our emotions around money aren’t limited to just investing.
Saving, borrowing, spending, earning, and giving all trigger their own unique brain chemistry. Your money fears and anxieties are, quite literally, in your head.
There are four main brain chemicals or neurotransmitters at play in the psychology of money:
- Cortisol makes sure that we place our attention and focus in the right place. When we sense danger or threat, our levels rise.
- Dopamine is about reward and motivation. When we achieve something great, dopamine is released and makes us feel good.
- Oxytocin is released when we experience trust or empathy. Hug someone you love and your brain will flood with oxytocin.
- Endorphins are released when you experience pleasure or satisfaction. For those who exercise and enjoy that so-called runner’s high, that’s your endorphins talking.
To apply these to money, let's look at spending. When shopping for ourselves, we’re likely experiencing big boosts of dopamine and endorphins.
With investing, our Cortisol Levels fluctuate dramatically. If markets are falling, cortisol levels will likely be higher. If markets are rising, our dopamine levels will rise.
The example of charitable giving is interesting. If you want to experience a drop in cortisol levels, but a boost in the other three, then the trick is to give. Whether it be your time, money or simply a random act of kindness, giving is great for those on the receiving end. But it’s also good for us too.
Why does any of this matter?
Because it proves the feelings we experience when it comes to money are just part of who we are: reluctance, excitement, optimism, fear, panic … These are all perfectly normal and unique to you.
This can be comforting to know, especially with the ups and downs that come with investing.
As always, long-term investors should remember that bear and bull markets are just part of the deal when you enter the stock market with the aim of generating long-term returns. While markets have had a pretty rough couple of years, the long-term outlook remains positive.
Those who can stay the course win. Those who flinch (sell, change strategy, manager, portfolio) lose.
With this knowledge, investors can pause and reflect, gain perspective on what triggers them, and even adapt.
