This tweet from a few years ago has stuck with me:
I go through life in a constant state of anxiety about how many likes my Instagram posts get, but when my grandfather was my age, he was in Europe getting shot at by Nazis. Our generation is so weak.
The tweet captures the notion that our fight or flight response has had few legitimate provocations in our relatively safe, modern world. In 21st century America, we are rarely in actual physical danger, and our fight or flight response tends to get triggered by non-dangerous situations such as work deadlines, our daily commute, political discussions, and perceived social snubs.
When engaged, the fight or flight response causes our sympathetic nervous system to jack up our metabolism, blood pressure, heart, and respiration rates, as well as dilate our pupils and constrict our blood vessels. This occurs to assist us in fighting or fleeing the dangerous situation – it primes us to act.
The recent stock market turbulence is a perfect example of a non-life-threatening event that can trigger the fight or flight response. When the stock market becomes volatile, it can cause us to feel the same way we would if a saber-toothed tiger were chasing us.
What can we do to combat the triggering of fight or flight response due when the stock market plummets? Here are five strategies:
1. Pull Back and Adopt a Big Picture Perspective
Periodic market volatility, market corrections (down 10% from a peak), and bear markets (down 20%) are a normal part of investing. The markets tend to go up over time, but don’t do so in a straight line. The stock market experiences volatility even in up years, averaging a 13% pullback at some point during the year. Further, the market endures a bear market about every six years.
Earlier this week, March 9th, marked the 11th anniversary of the lowest point of the S&P 500 during the financial crisis. Since then, as the chart below shows, it’s been a great run. Even with the recent slide, the S&P 500 is up 411% over the last 11 years. And now the market is at about the same place it was this time last year.
2. Remember the Lessons From the Financial Crisis
What did we learn just a decade ago during the financial crisis? Life goes on, markets recover, and those who try to time volatile markets often lose out. And as I noted in a previous article, investors who kept their heads and put capital to work during the worst of the financial crisis made out the best. Apply those lessons now. Don’t panic, stay disciplined, and look for the investment opportunities that market lows can present.
3. Remind Yourself that You Aren’t Really Under Threat
If you feel panicked by the markets, remind yourself that you aren’t really in danger. It’s just your fight or flight response. This story may help put things in perspective:
A friend of mine fled Bosnia during the war when he was a teenager. For years before his escape, he lived in a war-torn town, and his family was in constant fear of being killed. He escaped to Germany with his mother and brother and later moved to the U.S. where he and his brother now run a successful transportation company. His father was not able to leave Bosnia, and they found out years later that he was killed in the genocide. Partially as a result of these experiences, my friend is one of the calmest people I know. Nothing fazes him. He says that when you’ve grown up around war and death, common problems don’t seem very big.
4. Be Aware of Two Cognitive Biases that Aren’t Helping
A few cognitive biases are partially to blame for the pain we experience when the stock market drops.
The first is loss aversion, the theory that people experience the pain of loss about twice as strongly as the pleasure they feel in the midst of a gain. This asymmetry is part of the reason we react so strongly when we suffer a financial loss.
Another is the concept of anchoring, which occurs when we have a particular number or starting point in mind. It’s common for investors to anchor on the highest value their investment portfolio has reached. For instance, if your portfolio was $200,000 in January, and now it’s $185,000, it probably feels like you’ve lost $15,000. Thinking this way ignores the fact that a year ago the portfolio was $180,000, and five years ago it was $135,000. So, at $185,000, the value of your portfolio is still up. Plus, the market likely rise to new heights in the future.
5. Engage the Relaxation Response
An effective way to combat the fight or flight response is to activate the opposite reaction: the relaxation response. This physiological mechanism was discovered by Dr. Herbert Benson, who described it as a state of deep relaxation that engages the parasympathetic nervous system.
Dr. Benson found that initiating the relaxation response through regular meditation and breathing exercises can lower blood pressure by as much as medication. Research has shown it can also help manage health problems caused or exacerbated by chronic stress such as fibromyalgia, gastrointestinal ailments, insomnia, hypertension, and anxiety disorders. I find that when I start to feel panicky, engaging in the relaxing breath does wonders.
What Doesn’t Help
Besides the above strategies, the following investment practices can also help ease your stock market panic:
1. Don’t Look at Your Portfolio
No matter what the market is doing, long-term investors are best served by not looking at their portfolios too frequently for the same reason that dieters shouldn’t weigh themselves every hour. Like the stock market, it’s common for your weight to fluctuate throughout the day as you take in and expel food and water. If you weigh yourself every hour, the frequent changes can mess with your emotions and impact your thinking. You may start to indulge or restrict depending on what the scale says and lose sight of the big picture. Repeatedly checking your portfolio can create a similar reaction and should be avoided.
2. Avoid “Would Have Should Have Could Have” Thinking
Avoid thinking in ways that cause regret, such as saying to yourself, “I should have sold some stock a few months ago” or “I should have seen this coming.” Nobody has a crystal ball. Ruminating on actions we took or should have taken is counterproductive.
3. Attempting to Time the Market
Study after study has found that timing the markets is unproductive. If there were proven factors that signaled market tops and bottoms, everyone would know them, buyers and sellers would use the information to set their prices, and these signals would become ineffective. Thus, to predict a bear or bull market correctly, you would have to have information that no one else does – a nearly impossible feat in today’s information age. And you’d have to time the market right twice – once when you get out and again when you get back in – which is also highly unlikely.
Bringing it Together
It’s only human to react strongly to perceived threats given the way we are wired. However, in today’s world, our fight or flight response is often oversized and outdated. The panic we can feel is an ancient survival mechanism that’s not helpful when making modern-day investment decisions. So, sit tight and remember that this too shall pass.
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