By the 17th of April 2020, our Facebook group had been inundated with posts sharing forecasts and news articles trying to explain why the market went up or down that day. I could see that people were worried about the impact of the Coronavirus on their finances and their portfolios, and were just trying to figure out what they should do. Should they change their allocations, should they invest in oil, emerging markets, gold, do nothing, try and pick the bottom?
I wrote a post that resonated with many members and so, at the suggestion of our Chairman, I am writing this as a blog post to serve as a reminder of what to do in this current crisis and subsequent ones.
I want to share a few psychological insights and behavioural tips as an Occupational Psychologist that I think will help us all.
Your brain is a scenario building machine, designed through millions of years of evolution to try and protect you from danger. It is constantly trying to make sense of what is happening around you in order to keep you alive. This was a superb adaptation to help us survive on the Serengeti. However, it was never designed for investing.
Just to illustrate, imagine you are one of your ancestors hunting on the Serengeti for gazelle. And your eyes see a threat e.g. a lion, who has decided that you look better than the gazelle. Sensory data is sent to your amygdala and a number of chain reactions occur like flooding your blood with cortisol, adrenaline etc, your emotions are activated like fear and/or anger, and innate behavioural responses come alive like running.
You also have your pre-frontal cortex. It does a lot of things. But for our example, what is important is that this is the part of the brain that helps you problem solve and plan. Chances are if you were regularly hunting gazelle on the Serengeti, you would have likely faced lions before, learned from your elders and now know what to do. Maybe you have learned that you should hunt in areas with lots of trees to run up.
Now imagine that threat is a market crash. You are seeing your portfolio crash. You are reading news articles that are predicting the end of the world. Same brain, same response. But none of this will help you. Who are you going to fight? Who are you going to run away from? How would these emotions help you?
If your body is in fight or flight response, and you have not done any analysis, problem solving or planning, how well do you think you will respond to the market crash? Chances are, not very well.
The media articles various members of our group have posted, and chances are, will continue to post, is coming from a good place. They are following their biological instincts to share information and to try and work together to deal with a threat. However, the problem is a lot of it, I would say 99% is useless information. This is because NOONE knows what will happen and because there is almost NOTHING you can do about it.
Those who write articles sharing forecasts and offering explanations of what is happening are: A. Trying to make a living by trying to get as many clicks as possible. B. They are human too and so will experience all the emotional, behavioural and physiological changes and mistakes I described above. Most are also not professional investors. C. They get clicks by trying to scare you. Your brain and body were not designed to be in a permanent state of being scared and stressed.
D. Based on what they see, they try to whip up a story, which they tend to change their tune as time progresses. Pick a few well known writers and follow them. See how consistent they are.
So what should we do? Your biology is telling you to DO SOMETHING as designed i.e. fight or run, but if you have done your reading, you'll know you should DO NOTHING. ABSOLUTELY NOTHING! JUST STAY THE COURSE! That's the hard part. Getting your prefrontal cortex to override your limbic brain's impulses.
BUT HOW? As my good friend Steve Cronin says, you can't prepare for a hurricane during the hurricane. You have to do it before. 1. Create your investment plan according to the Bogleheads principles, and nothing else! They are built on EVIDENCE, not speculation by a media writer trying to get clicks. They will change their tune daily. Check out the Bogleheads wiki (bogleheads.org/wiki/Getting_started), and check out our resources webpage (https://www.simplyfi.org/resources-and-tips). 2. You need to read and learn, at least the basics. Expecting others to spoonfeed you during the hurricane is not the way forward. This is a DIY Facebook group, not a free financial advisory service. We are about empowering ourselves. And there is no rush to invest now if you don't know how or haven't set up your investment plan. There will be other opportunities in the future. 3. So the next time you get an impulse to post another clickbaity news article, or to even listen to the article, ask yourself 3 questions. A) does the EVIDENCE support what is being written? B) is the conclusion LOGICAL? C) will this HELP me and/or others? If the answer is "No" to any of these, DON'T POST IT. DON'T LISTEN TO IT.
I will apply the same to this blog post.
A) Where is the evidence? Follow this link to the SPIVA scorecard: https://us.spindices.com/spiva/#/reports. Standards and Poor regularly report on the performance of active fund managers and their research reveals how badly they perform against the index. This is because they don't fully understand (to be fair no-one does) the massively complex engine that is the world economy, which therefore explains why they cannot predict what it will do. That is why most cannot beat the index consistently, so might as well invest in an index fund. 2. Behavioural bias literature. Here is a nice introductory guide: https://www.vanguard.co.uk/documents/portal/literature/behavourial-finance-guide.pdf
3. You don't pay for your media articles: https://www.reuters.com/article/us-global-media/the-media-has-a-big-problem-reuters-institute-says-who-will-pay-for-the-news-idUSKCN1TC2WV
B) Based on the evidence, the conclusion above is logical.
C) Is it helpful/ pragmatic? Yes, because it is focused on what we can do, not what we can't do. For example, at the time of writing this, articles are referring to influencing factors like central bank interest rates, oil deals between OPEC members etc, of which you can do nothing about. Once you have set up your plan according to the Bogleheads principles, you don't have to scour the internet looking for investment opportunities. You already bought the whole world and will beat most professional active fund managers.
So, during this time, spend your time indoors to remain healthy, exercise, talk to family and friends, and read up on the Bogleheads principles. Even Jack Bogle during the hard times went back to what he wrote to remind himself of the principles.
Wish you all good luck and revisit the article any time your instincts tell you to do something.
Here are references quoting scientific research, but actually make for easy reading: