CHAPTER 7
Your Investor Stress: Smoothing Out the Ups and Downs
Brain cells create ideas. Stress kills brain cells. Stress is not a good idea.
—Frederick Saunders
Dan came to see Dr. Peterson at his coaching practice for an unusual—and improbable—complaint: He had lost money in each of his last 17 investments He was deeply concerned because he loved to manage his own money.
Being familiar with statistics, Dan understood that it’s rare to be wrong by a substantial margin 17 times in a row. To put this in perspective, the odds of losing 10 coin flips in a row is 1 in 1,024. And though investing is not the same as flipping a coin, Dan had blown through 17 consecutive risk/reward scenarios without winning. And the streak was still going. Confounding matters was that his investments were scattered across different asset classes and were made during both bull and bear markets. It didn’t seem to matter when and where he put his money, he still lost.
Dan was a rational person, but these losses had affected him to the extent that he was beginning to believe “God hates me,” and he felt dejected and depressed most days.
So what was Dan’s approach? He told Dr. Peterson that he was a fundamental investor who bought stocks and commodities cheaply and sold them for a profit as the market appreciated their true value. Dan enjoyed investing in “penny stocks” trading under $1 per share, because that was where he often saw good value.
As Dan was explaining his buy and sell techniques, it became clear that he wasn’t actually using the discipline he was describing. Dr. Peterson dug a bit deeper, and this is what Dan related: “I buy when a potential investment I’m watching starts to take off.” And when did he sell? “Well, I guess I sell if it reverses.” And why did he invest like this? “Well, I guess the losses are changing me. I’m just reacting to the markets now. I’ve kind of lost focus.”
Dan’s problem was not statistically outrageous “bad luck.” Nor did God “hate” him (as far anyone can tell). And for the record, he had not been cursed by a voodoo priestess nor recently built a home on a sacred burial ground. There was a much simpler explanation for his troubles: stress. Stress that manifested itself in predictable, consistent reactions to price moves that virtually guaranteed losses. When short-term stress arises, usually suddenly and without warning, its mental effects are such that we have great difficulty taking action to relieve it internally without taking some action externally. Yet too often, those stress-relieving external actions are extreme behaviors such as rapid-fire trading or avoidance of the problem entirely. The most challenging aspect of short-term stress is the inability to see outside of it—to gain perspective . Stress hormones focus our attention in the short term, which makes sense biologically. Our minds want us to be attentive to potential threats right now. Ironically, in the financial markets, it’s stressful short-term “price fakes” that often shake us out of our long-term plans
In general, there are three ways of addressing and reducing the impact of stress on investment decisions:
1. Inoculate yourself from the mental effects of stress with a preventive lifestyle.
2. Learn and utilize immediate stress-relief techniques when stress or tension are present.
3. Plan ahead for stressful periods using a Financial Stress Management Plan.
Theoretically, it should be straightforward to manage stress and anxiety. Unfortunately, anxiety is like an iceberg. Ninety percent of it lies beneath conscious awareness.
As you go through this chapter, consider the ways that stress affects you and how you could reduce its effects on your life. In this chapter we offer techniques for minimizing stress and worry. An entire chapter is needed about these emotions because they are the leading cause of investing mistakes. On the other hand, frightened traders create some of the best opportunities for courageous long-term investors.
Stress: An Overview
Stress is the condition that results when person-environment transactions lead the individual to perceive a discrepancy—whether real or not—between the demands of a situation and the resources of the person’s biological, psychological or social systems.
Stress arises out of a conflict between expectations and reality. It’s stressful if we expect a result that we just can’t achieve, and it’s stressful if we’re stuck in a situation that is becoming worse by the day. It’s also stressful if we feel that we can’t control our financial future, which is the uncomfortable feeling most investors have when markets are volatile.
At low levels stress can be motivating: It stimulates activity, sharpens attention, and drives positive action. Even brief episodes of high or moderate stress, such as experienced during an amusement park roller-coaster ride or during competition, can be exhilarating. For most people, moderate stress, over a short period, feels good. Successfully coping with moderate stress can have beneficial physical and emotional effects.
At extreme levels, stress can induce an overwhelming fight or flight urge (panic). Even worse is prolonged high stress, which leads to a number of negative physical and mental consequences. Such chronic stress impairs short-term memory and concentration, contributes to accelerated aging, decreases immune function, disrupts sleep cycles, raises blood pressure, depresses mood, induces apathy, and diminishes energy. Eventually, chronic stress results in “burnout.”
Every investor experiences stress at some point during his or her career. Stress would be of little consequence if it weren’t for two important facts:
1. Stress alters how we think.
2. Many of the most important decisions of our lives are made while we are stressed.
Make no mistake, many choices that alter the courses of our financial lives—entering large investments, enduring major panic selling, and the decision to forgo adequate due diligence on an investment—are often driven by stress. Outside of investing, life-changing decisions such as whom to marry, when to have children, what city to live in, and what university major to choose are often made when we’re feeling stress and uncertainty.
Physical Effects of Stress
“Traders age in dog years.”
The above saying, heard on many trading floors, gets to the essence of what chronic stress does to the body and brain.
Investors dwell in a state of continual short-term uncertainty. And for most investors, worry is a constant companion. Yet worry about what you cannot control not only wears you down, it keeps your attention riveted on the negative. You could say that worrying is like praying for what you don’t want. And stressing about what you cannot control only impairs your ability to make solid plans for overcoming it.
For example, researchers found that dogs who were given electric shocks that they could terminate by making body motions got fewer ulcers than “yoked” dogs who were given identical but uncontrollable sequences of shocks.
2 (And no, we’re not fans of that study either.) Our perceived ability to exert some control over a noxious event reduces the amount of worry and distress we experience.
Another danger of stress and worry is that it induces passivity. Chronic stress decreases motivation and saps the drive to take effective action. All the more reason to plan ahead now for those future times when investment stress softens your willpower.
Importantly, researchers have found that many people are willing to suffer immediate adverse consequences now, such as a higher-voltage electric shock, rather than wait patiently for a lower-voltage electric shock up to a minute later.
3 Apparently the anxiety they suffer while waiting for the lower-voltage shock is so painful that they simply choose to “get it over with” with the more painful shock now. This is how investor panic functions in the markets. Panic relieves stress, tension, and anxiety, regardless of the fact that its long-term consequences are significantly more damaging to one’s long-term wealth.
To manage investment stress, control must be exerted where it will have an effect, such as in designing consistent money management systems, performing superior research, establishing a solid investment philosophy, creating a financial stress management plan, and communicating appropriately with one’s advisor. As we have noted throughout this book, successful investors orient their investing in terms of a consistent process-oriented frame as opposed to a short-term outcome-orientation. Yet worry and stress draw us into short-term thinking. Keep in mind that we generally cannot control our short-term results in the markets, but we can successfully manage our long-term investment process by planning ahead and keeping a long-term life-focused frame of mind.
Choking
In the financial markets, there is no room to “choke”—to let anxiety interfere with optimal performance. Yet choking always becomes a threat when the stakes (and one’s performance anxiety) are high.
Duke University professor Dan Ariely, author of the best-selling book
Predictably Irrational (Harper Perennial, 2010), performed experiments on the nature of “choking” in high-pressure situations. He set up a scenario in which individuals performed athletic and mathematical tasks for financial rewards several times their average monthly salaries. He found that financial incentives were motivating and improved performance, up to a point. Beyond a certain level of potential gain (approximately one month’s salary) individuals could not manage their anxiety, and their performance deteriorated.
4Such high-stakes scenarios often occur among investment bankers trying to clinch an unprecedented deal or when people are competing for a large windfall.
With 14 gold medals, Michael Phelps is considered one of the best athletes in history. Even he uses anxiety management techniques to prevent “choking” in response to performance anxiety. For Phelps, the techniques he uses have become integrated into his daily life.
“Phelps’s coach, Bob Bowman, says ‘structured relaxation’ has been a part of Phelps’s prerace routine since he was 12 and is instrumental to his success.”
5Bowman introduced Phelps to a progressive relaxation program based on the recitation of cues. Every night before Phelps went to sleep, his mother, Debbie, would sit with him in his dimly lighted bedroom and work with him to relax different parts of his body.
After a while, Phelps could relax without his mother’s cues, and he became expert at placing himself in a meditative state in the ready room before a race. Once he had cleared his mind and loosened his limbs, Phelps would swim each race over and over in his mind.
It is not just the perfect race that Phelps pictured. He saw himself overcoming every conceivable obstacle to achieve his ideal time. As a result, when he stood on the starting blocks he felt as if nothing could stand in the way of his success.
“I do go through everything from a best-case scenario to the worst-case scenario just so I’m ready for anything that comes my way,” Phelps said.
6Phelps has internalized structured relaxation exercises because the ability to relax under pressure is one key to his success.
How might performance anxiety trip you up as an investor? If it has been problematic for you, or you anticipate that it could be, it’s important to set up a structured relaxation program. The next section contains several structured exercises for managing anxiety.
Managing Short-Term Investment Stress
Bill Gross manages the world’s largest bond fund, PIMCO, with over $1 trillion in assets under management. In the run-up to the credit crisis of 2008, due to several warning signals about the economy’s overheating and advice from a PIMCO trader, Scott Simon, Gross readjusted his fund’s holdings into more conservative Treasury bonds and small positions in CDS mortgage bond insurance.
Gross positioned himself conservatively well in advance of the crisis. In 2006 PIMCO’s performance trailed that of its peers. “It made Gross so miserable that he had to take an unplanned nine-day vacation midway through the year; it made Gross so miserable that he spent most of the vacation sitting around the house, sulking to his wife.”
7“I couldn’t turn on the business television; I couldn’t pick up the paper. It was just devastating. You can’t sleep at night.”
8The markets are rarely predictable in the short-term, yet investors are almost inevitably drawn into a win/lose, short-term performance game, especially if they have clients who track their daily performance relative to their peers, as did Bill Gross.
Certain types of financial feedback predisposes investors to stress. Traders who watch price quotes tick by tick, or minute by minute, are particularly susceptible to chronic stress and burnout. The more one checks stock quotes, the more likely they are to see volatility. Because the brain, on average, experiences the pain of every downtick with twice as much intensity as the joy of every uptick, the brain undergoes a slow stress erosion. Fortunately, experienced traders have decreased stress responses to market volatility.
9To prevent stress when opening your latest account statement or hearing about recent financial calamities on CNBC, plan ahead by instituting predetermined alarm levels (most brokers offer such alarms). Additionally, it can be very helpful to reduce investment “noise” by avoiding financial news that isn’t relevant to your investment strategy, and if you’re a “buy-and-hold” investor, then essentially all the financial news is irrelevant. Also try to avoid multitasking when researching an investment. That is, determine the three or four pieces of information that matter to your strategy, and don’t look at the rest.
Social support diminishes the stress response, and attendance at professional investors groups, such as AAII (American Association of Individual Investors), angel investor groups, CFA Society meetings, the Market Technicians Association, or other organizations can be an excellent source of social support from others dealing with similar challenges in the markets.
Many great investors report that constant information monitoring, although isolating them, helps them identify developing opportunities before others. Yet this type of monitoring is not possible for casual investors. Nonetheless, many part-time investors try to monitor markets frequently, which only increases stress. It’s helpful to set strict boundaries on the information you monitor, otherwise it’s easy to be pulled into reading excess import into random “noise.”
As we’ve explained in this chapter, as stress levels rise, the brain becomes cognitively inflexible and unable to think of solutions to increasing losses. Suddenly panicking out of bleeding positions may appear the only viable option to reduce tension. As a result, it’s important to develop habits that inoculate against stress, thus preventing short-term stress from derailing your long-term plans.
Simple Stress Reduction Techniques
A “short-squeeze” happens when a stock increases rapidly in price, leaving investors with short positions (i.e., bets that the stock will go lower) feeling “squeezed.” The desperate buying of “squeezed” shorts itself generates a positive feedback effect, driving a security’s price higher. Short-holding veterans of short-squeezes can easily recall the mental mush their brain becomes while witnessing rapidly escalating losses.
The inability to think clearly during a short-squeeze is due to the effects of stress hormones on the brain. Thinking clearly can only occur when stress hormone levels decline. “So how,” you ask, “can I reduce stress hormone levels when I’m freaking out, because of a short-squeeze or otherwise?” Excellent question.
Stress and anxiety management techniques that are “preventive”—essentially inoculating you to stress such as meditation, yoga, and exercise routines—require self-discipline and a commitment to practice. Even without such discipline, however, there are immediate stress-reduction techniques that can be used anytime, anywhere, as needed.
The easiest and most immediate technique for relaxation is deep breathing. At Stanford University Dr. Peterson participated in an experiment with facial EMG equipment. This equipment measures arousal in facial muscle tone and skin conductance. At the time of the experiment, after being hooked up to the skin and muscle monitors, Dr. Peterson felt relaxed. He could see a slow-moving pattern of muscle activity languidly tracing across the computer screen. But after taking a deep breath at the request of his instructor, he was amazed that the tracing dropped to the bottom of the graph. He had been extremely tense at baseline, without realizing it. One long deep breath relieved the underlying tension.
Try the following breathing technique. As you inhale, silently count “1-1,000, 2-1,000, 3-1,000,” as you smoothly and evenly draw in the breath. Then pause for one second. Then as you exhale, silently countdown “3-1,000, 2-1,000, 1-1,000” breathing out slowly and evenly. After a one-count pause, repeat the cycle. You can repeat this breath-work over a period of as little as five minutes and experience significant stress relief. Remember to do it in a quiet location.
Another way to reduce immediate stress is to consciously reframe your thoughts by putting your current troubles into a long-term, big-picture perspective. Imagine yourself on a mountaintop, and then contemplate the view out over the plains and mountains to the horizon. Or see in your mind the ocean stretching into the distance. Alternatively, imagine yourself looking up at the stars at night while hearing the crackle of a campfire. Slowly feel yourself expanding into the space and sky all around you.
As described previously, Michael Phelps practices structured muscular relaxation. That technique involves sequentially tensing and relaxing the muscles in your body from lower to upper. For example, tighten your feet, hold the tension for a breath, and then slowly relax the muscles. Then tighten your calves, hold the tension for a breath, and then release. Move upward, breath by breath, contracting and releasing your thighs, buttocks, abdomen, hands, arms, chest, shoulders, neck, face, and scalp. When finished sit silently, eyes closed, breathing slowly and evenly, for three to five minutes.
To relax specific tense muscles, such as tight shoulders or neck muscles, try contracting the tense muscles intentionally and holding them firm for several seconds. Then release.
Some aromatherapy scents such as lavender relax the mind. Burning incense and playing soft music have also been shown to reduce stress. Walks in nature and warm baths are usually helpful. Exercise, play, and dance are also methods of short-term stress relief that can become supportive lifetime habits.
Following is a full list of immediate anxiety-reduction techniques:
• Breathing exercises
• Vigorous exercise
• Laughing
• Meditating
• Scheduling a time to “worry”
• Prayer
• Contemplating mystery or the universality of uncertainty
• Psychotherapy techniques, such as cognitive-behavioral therapy
• Herbal remedies such as chamomile tea (a sedative) and lavender aromatherapy
• For clinical anxiety disorders, medications such as selective serotonin reuptake inhibitors (SSRIs), benzodiazepines, and beta blockers can be helpful
While the preceding are short-term stress fixes, it is long-term changes in lifestyle, such as regular exercise, regular sleep habits, meditation, religious practice, cultivating faith, self-analysis, abstinence from alcohol and caffeine, and social affiliation, that cultivate the best long-term stress resilience.
Exercise and diet are the cornerstones of every doctor’s recommendations for optimal health. Eating whole grains, lots of fresh vegetables and nuts, and cold-water fish (and other high omega-3 foods containing DHA) all have benefits. Exercise includes anything from strolling to mountain climbing. The general idea with exercise is that you are gradually increasing (or maintaining) the limits of your endurance—exercise should be somewhat challenging, but not painful. Cardiovascular exercise is particularly beneficial for longevity and mental acuity. Exercise releases growth factors, both in the tissues and also in the brain, which enhances new neuronal growth and repair. Along those lines, a varying routine of exercise, in a playful or challenging context such as competitive sports, is especially healthy for the brain. Some forms of moving meditation, such as yoga, include a physical exercise component and so merge the benefits of exercise and meditation.
Meditation, Yoga, and Lifestyle
Meditation refers to a variety of practices that intentionally focus attention, helping the practitioner disengage from unconscious absorption in repetitive and habitual thoughts and feelings. Studies have shown that meditation practice can lead to improved emotional health. There are several styles of meditation. Mindfulness meditation teaches practitioners to nonjudgmentally cultivate present-centered awareness. Such awareness is that in which each thought, feeling, or sensation that arises into consciousness is acknowledged and accepted as it is. Mindfulness meditation has been shown to increase life satisfaction and bolster the immune system (increasing the antibody response to cold viruses).
10Concentrative meditation is a second broad type of meditation. It involves focusing on a mantra (phrase or word), image, or object. In various studies of concentrative meditation, such as Vedic meditation and transcendental meditation, it has been shown to improve mood,
11 decrease anxiety,
12 lengthen attention span,
13 and enhance feelings of connectedness, gratitude, and compassion.
14 It makes sense—if we assume that the mind is like a muscle, and we are practicing sustained attention on a daily basis, then the neurons that support concentration and impulse—control will be strengthened. Please see the instruction guide for meditation practice in Appendix A for more information.
Some individual exercises such as yoga train both the mind and the body. Yoga is a discipline developed to “yoke” (the literal meaning of “yoga”) the mind. Yoga teaches breathing and meditation skills while simultaneously toning the musculature. Psychological research indicates that yoga reduces the signs and symptoms of anxiety,
15 depression,
16 attention deficit-hyperactivity disorder (ADHD),
17 addiction,
18 and obsessive-compulsive disorder (OCD).
19 Additionally, emotional stability and patience increase during a regular yoga practice.
One of the most taken-for-granted factors in emotional well-being is social connection. Positive social interactions, including in one’s work environment, are essential to long-term well-being. For many people, social connections can be easily put aside while work responsibilities dominate, but this is a mistake. Intimate friendships (in which outside problems can be vented) and family support significantly promote mental health.
Tend Your Garden Regularly
Most investors enjoy the rush of trading. They like taking risk and savoring the thrills of the market roller coaster. Does this describe you? If so, you should consider setting aside a small percentage of your total capital for recreational trading (“play money”). This will allow you to get a thrill using a small portion of your total assets without jeopardizing your long-term financial security.
To prevent short-term derailments with your investments, both due to taking excessively high-risk positions or panic selling, it is useful to set up a consistent and regular schedule for monitoring them. If you aren’t a short-term trader who can assess the meaning of every bit of breaking news, then it’s important to use a long-term scheduled approach to monitoring and adjusting your investments.
For example, many people set aside one weekend during the winter and one during the summer to sit down with family and investing professionals. Such investment review weekends are spent educating children, revisiting current investments, discussing fundamental economic changes, and reallocating investment capital for the next six-month period. In some ways, families who follow such a protocol are teaching their children how to grow capital as if it had been planted in a garden. They are investment farmers, taking their time to review each “plant” and ensure it has adequate sunlight and soil to grow and produce the expected yield. If not, it is pared back and a new plant is grown in its place.
Cognitive-Behavioral Techniques for Long-Term Stress Management
This section is devoted to cognitive-behavioral psychotherapy and stress management techniques. Now, I realize that in the opening of this book we promised to be psychology-jargon-free so we could reconcile with our financier readers. Well, we didn’t exactly lie, but we think that some of the jargon is useful and descriptive. That’s the case with cognitive-behavioral therapy.
Cognitive-behavioral therapy (CBT) is a popular and effective form of psychotherapy used for everything from getting high-performers out of a slump to the clinical treatment of anxiety, depression, and obsessive-compulsive disorder. CBT therapists help clients develop concrete coping skills and strategies. They use such techniques as:
1. Challenging self-defeating beliefs
2. Teaching positive self-talk skills
3. Replacing negative thoughts with supportive ones
4. Desensitization and conditioning to stressful events
5. Education about symptoms
6. Teaching coping skills such as relaxation breathing
CBT therapists believe that one’s thoughts and feelings during stress are often repeating patterns, and they may be leading to habitual, and counterproductive, coping behaviors. If the stressful pattern can be mentally broken, then the unhelpful stress response is halted.
Individuals who use the following guide can more easily learn to identify the maladaptive, stress-inducing thoughts they habitually experience. You can use the following exercises for assistance in challenging your negative or unhelpful thoughts and consciously replacing them with more adaptive ones. If you do conscious thought replacement exercises daily and keep track of the changes you notice in your daily life, you’re likely to discover subtle improvements such as milder reactions to usually stressful events, people, and circumstances.
Ask yourself these questions to disrupt negative patterns of thinking that aren’t serving you:
• Is there an alternate explanation to the negative one running through my mind for why things aren’t working out?
• What is the evidence that my negative thoughts and assumptions are actually true?
• What will be the effect of continuing to think this way (will I not take new opportunities, or assume the worst excessively)?
• Given the bad situation I think I’m in, what is the best outcome, worst outcome, and most realistic outcome?
• What is the likelihood that the worst (best) outcome will happen?
20 Record your responses to stressful events in a table like
Table 7.1 in order to develop a clearer comprehension of how they affect you. The example is from the journal of a professional money manager.
The core skills learned in stress management programs are self-observation, cognitive restructuring (as noted in
Table 7.1), relaxation training, time management, and problem solving. Self-observation is often practiced using a daily diary or journal (
Table 7.1 can serve this purpose). In the journal, people write down stressful moments of their day in the first column. In the next column, they write down antecedents to the stressful event. In the third column, they document their behavioral reaction, and in the fourth column, they describe the consequences of their behavior. Investors using this strategy can gain awareness of their automatic behavioral patterns, learn to identify the precursors (eventually, they may see repeating patterns), and reduce stress-related biases. Consciously addressing the triggers, reactions, and consequences encourages interruption and eventual prevention of one’s usual (and unhelpful) patterns.
Table 7.1 Journal Format for Recording Stress-Related Events
Getting Out of a Slump
Many investors, at one time or another, find themselves making consistently bad decisions. Often, a losing streak is simply bad luck, but many investors begin to believe it reflects problems with their strategy or personality. This is one reason why back-testing one’s strategy (with the appropriate caveats) is so important—it supports confidence in the strategy during a series of draw-downs. As slumps weaken one’s decision making, they may fuel a vicious cycle. In order to psychologically get through a slump, try the following cognitive techniques (many were adapted from trading coach Doug Hirschhorn and Shane Murphy’s excellent book,
The Trading Athlete 21):
1. Recognize that slumps happen to everyone.
2. A slump is a statistical reality—go over a similar market history to what you’re dealing with now. Determine the length and breadth of the worst draw-downs over that time period. Chances are you aren’t doing any worse now than you would have during some similar historical periods.
3. Remember that slumps are temporary. Slumps always reverse, though they may need some time. For example, many long-term buy-and-hold investors had trouble staying invested through the 2008 market crash, but in 2009 their patience was partially redeemed.
4. Don’t fight the slump. Cultivate patience and use this opportunity to do more research on your investment style.
5. View the slump as a time to rest and regenerate. When the markets turn in your favor, be sure to reemerge even stronger.
6. Remember: It’s not about you. The markets aren’t personal.
There is a saying in psychotherapy that every session with the therapist begins at the same subconscious point where the last one left off. The same could be said of one’s dealings with the markets. Psychologically, you will begin reinvesting in the state of mind induced by your last experience in the markets. It is very helpful to stay in the game and keep learning so that personal doubts don’t overwhelm your ability to grow and maintain perspective.
The ability to successfully climb out of a slump results from one’s innate level of resilience. Psychologists have developed an entire field of study about resilience, understanding why some people are more resilient than others and studying techniques that can be used to reinforce resilience.
Cultivating Resilience
In life, everyone is knocked down occasionally. Resilience allows us to spring up faster and with more enthusiasm. Resilience is cultivated when we’re exposed to stress and we stay in the challenge, learning what we can do to grow, adapt, and thrive.
The process of building resilience begins with a stressful event or dislocation. Identify what is stressful about the event—for example, is it the feeling of letting down your family or clients? Is it the uncertainty or ambiguity around the economy’s future? Are you beginning to suspect that your investment philosophy may need a comprehensive overhaul?
1. Identify how you are responding to the stress. Do you withdraw? Work harder? Focus on what you know rather than looking for new sources of information? These are common reactions.
2. Now, consider what you can control about the situation. In most cases, your behavior and your reactions are the only aspects that can be managed. Focus on your actions and yours alone. What steps can you take to give yourself the best chance at success?
3. Identify others who will support you as you work through this challenge—who is in your network of colleagues, friends, family, or professionals who can help you with problem solving? Don’t assume someone won’t assist you if you’ve never asked. A big part of developing resilience is gaining the courage to ask for help. Learn whom you can count on and receive their assistance, so you don’t feel alone in fashioning a plan.
4. Take time for breaks. No one can work constantly, responding to emergencies every day, and still develop a coherent game plan for going forward. Stop to take time to listen to yourself and the world around you. First, stop the information flow (turn off your BlackBerry and the TV). Then do what works for you—take a walk in nature, exercise, do yoga, meditate, pray, and so on.
5. Write down what you are grateful for. Every day add at least three new items to a gratitude list (see Appendix B). This will keep you positive and thinking about what you have (instead of what you don’t have).
6. Visualize your “best possible self” every morning. Resilient people imagine themselves overcoming challenges with grace and alacrity. If you can’t imagine yourself succeeding, then visualize that you are your role model. What would he or she do? This visualization process puts you in a can-do state of mind, which accelerates problem solving.
7. Once you have survived, focus on thriving. What can you do to make and consolidate gains? Schedule a time each day to identify advantages you can bring into your business. Then execute and use those techniques that are working in the new environment.
There are solid biological reasons why this seven-step plan can help cultivate resilience. For example, hormones such as vasopressin and oxytocin (the “trust hormone”) appear to be higher in resilient individuals. You can raise your own levels of oxytocin by having more physical contact and loving/trusting interactions with others. Mistakenly, many people under stress spend more time in their offices, working longer and isolated hours, and thus avoiding contact with and support from their partners, friends, and families.
Taking Care of Yourself
In order to personalize what you’ve learned so far about immediate stress relief, stress-inoculation, and resilience, please answer the following questions:
• What types of investing situations are most stressful for you?
• How do you act differently after a stressful event (a loss, bad news, etc.)?
• How do you successfully decompress?
• How can you incorporate constructive, immediate stress-relief activities into your schedule?
• Which long-term stress-inoculation lifestyle changes make sense for you to begin?
So far in the chapter we’ve covered techniques for managing immediate stress and preparing for future stress through changes in your lifestyle and habits. In the next section we introduce a written plan, called the Financial Stress Management Plan, which will provide you with a plan in case of crisis. While most people have emergency disaster kits in their cars or at home, they rarely prepare emergency plans for the storms that pass over the financial markets (and their portfolios). And it’s often the panicked actions we take during these storms that does the most damage.
Financial Stress Management Plan (F-SMaP™)
Decisions made under stress are impaired decisions. The impulsive, emotion-driven choices we make under duress are designed to provide immediate relief—and they often do. But that relief typically comes at the cost of long-term performance.
It takes surprisingly little to torpedo an investing plan—just a moment of distorted thinking and impulsiveness. We are most vulnerable when our investing stress-level has exceeded our ability to cope. It behooves every investor to have a plan to manage that stress. We call it a Financial Stress Management Plan™—F-SMaP™ for short. The F-SMaP is a risk management plan, with a kick—it requires a personal commitment to follow through.
There are a number of reasons why every investor should create an F-SMaP. Consider a scene in the movie Analyze This, starring Robert DeNiro as Paul Vitti, a mafia boss with a violent temper, and Billy Crystal as Dr. Ben Sobel, his reluctant psychotherapist.
In one scene, Paul is in the midst of a psychotherapy session with Dr. Sobel. Paul has tried, unsuccessfully, to resolve a conflict with a rival gangster. His rage has boiled over, virtually to the point of being homicidal. Dr. Sobel intervenes, and he attempts to teach Paul better coping skills.
| Dr. Sobel: | “You know what I do when I’m angry? I hit a pillow. Just hit the pillow, see how you feel.” (DeNiro’s character pauses for a moment, thinking. |
| Then he shrugs, pulls a handgun out of his pocket, and fires it into the pillow next to him six times. An uncomfortable silence ensues.) |
| Dr. Sobel: | “Feel better?” |
| Paul Vitti: | “Yeah. I do.” |
| Dr. Sobel: | “Good.” |
This scene is played for laughs. But the concept behind Dr. Sobel’s suggestion is psychologically sound; if you feel the need to act out, do so in the least destructive way possible. Remember, if you are experiencing a strong emotion, it’s important to discharge it (safely) so that you can think more rationally going forward.
Having healthy coping alternatives as an investor is so important for this reason. As we like to say, you’re not paranoid, “The Market” really is out to get you. And one of its cruelest tricks is to compel us to take actions (make decisions) when we are least equipped to do so. Here is where the F-SMaP comes in.
The F-SMaP is a device that helps us regulate our stress level so that (1) we do not feel forced into making inopportune choices, and (2) the choices we do make will be constructive rather than destructive.
Fear vs. Panic
An F-SMaP is a truly personal exercise, and there are a lot of right ways to construct one. While it can be done on one’s own, we encourage investors to enlist the help of a partner or trusted financial advisor. Having another person present to ask us good questions fosters self-reflection and moves the process along past stubborn emotional defenses. A rudimentary F-SMaP can be constructed in about 20 minutes, but it is best to put more thought into it than that. Ideally, it should be constructed over several sessions, and periodically revisited afterwards.
Following is a six-step process for setting up an F-SMaP.
Step 1: Acknowledge the Bad Times—Past, Present, and Future
Review a list of market declines and what drove them both in the past and in today’s climate. For an example of why this is so effective, let’s look at an example that has nothing (and everything) to do with investing.
Mithridates was an ancient king in what is modern-day Turkey in the first century B.C. Being a king back then was a dangerous job. People were constantly trying to kill you. One of the favorite methods was through poisoning. And indeed, his enemies attempted to kill him on multiple occasions by slipping arsenic and other deadly poisons into his wine and food. But Mithridates had great wisdom. Recognizing the precariousness of his position, he prepared for the inevitable assassination attempts years in advance by sampling small bits of every poison in the land. He had literally made himself poison-proof. (So much so that when he tried to commit suicide by poisoning himself to avoid the shame of being captured by the Romans, he was unable to drink enough to do the job!)
Back to the present century. The wisdom of Mithridates is relevant to the modern-day investor. We know “The Market” is going to launch its attacks on our net worth, and those attacks will be emotional in nature (e.g., fear, shock, confusion). One of its chief weapons is surprise. We can inoculate ourselves emotionally, literally building up our resistance to the emotional threats by taking small tastes of the market’s bitter poison along the way. We do this by reminding ourselves, especially in good and stable times, that it will not last. (Take a small sip of poison.) It sounds like a downer, I know. But the goal here is not to make you more popular at cocktail parties. It’s to keep conscious the inevitability of market declines so that when they come, they do not catch us off guard and we can make good, preconsidered decisions.
Yes, the market has trended up over the years and we believe it to be a safe place to have your money in the long term. But the market also reacts to itself. If there is a party, there’s going to be a hangover. Failure to recognize this truth while dancing with the lampshade on your head results in headaches, literally and figuratively.
Take some time to hypothesize about the future. Brainstorm a bit. Think you can’t predict the next crisis? Sure, you can. Some likely events include:
• Elections
• Monetary crises
• Commodity/energy problems
• Health scares and pandemics
• Terrorist attacks
• Border dispute
• A coup d’etat
• Natural disasters
• Internet or communications freeze
• War
• Credit defaults (et tu, Greece?)
• Banking panics
There is no way to pinpoint the exact timing or all the details of a crisis, and as such, there is no sense in fretting about it. But predicting an event is tantamount to controlling it. You cannot be blindsided by something you see coming. And this method has the virtue of instilling the investor with the sense that “I knew this was going to happen.” It’s a great way to maintain our emotional equilibrium.
Go ahead and make some predictions. Get in touch with your inner wet blanket. Then write them down. You can use them later as part of your own F-SMaP.
Step 2: Maintain a Rational Anchor
The emotional currents will move investors, but having a rock-solid anchor of rationality is still a great way to maintain your ground. That’s why it’s useful to include a phrase or a motto that keeps conscious why most investors fail. Some favorites include:
“The greatest destroyer of wealth is short-term circumstances frightening people out of their long-term plans.”
The four most dangerous words in investing are “This Time It’s Different.”
“Investing is a marathon, not a sprint.”
Whatever works for you is what’s best. What’s important is that you keep this anchor conscious, and preferably visible. When the market is in decline, your outlook becomes foggy. Having a mantra, a place you can turn to reset your focus, is a light in that fog.
Step 3: Determine Your Personal Stress Reactions
Often we are not aware that we are experiencing stress at all. The symptoms and early warning signs (George Soros is famous for reversing his weakening positions when he felt his lower back stiffening up) provide clues that we have wandered into an unhealthy place from which to make decisions. Take some time to think about and record your physical/mental reactions to stress.
Some common reactions include:
• Aches/pains
• Disruptions in sleeping
• Eating too much/too little
• Strange dreams
• Tenseness/headaches
• Dyspepsia (upset stomach)
• Irritability
• Recurring worries (rumination)
Also pay attention to your triggers. What events tend to bring on these investing stress reactions?
Step 4: Engage In Healthy Coping Mechanisms (i.e., “Hit the Pillow”)
We all do things instinctively to reduce our stress level. Sometimes those things are constructive, but they can also be maladaptive and serve to compound our problems. Things like exercise, meditation, organizing and cleaning, and hobbies are all constructive stress relievers that can be added to the program. They should be viewed as healthy activities to engage in when you are feeling market stress—or even to maintain a healthy mind-set during bad markets in general.
Much of investing stress comes from getting drawn into a short-term focus. It can be useful to engage in stress-reduction techniques that specifically target this problem. Doing so gets the investor back into a healthy mind-set, or even just buys time to get through a bad day or two. Some suggestions include:
• Take a market “time out” in which you simply agree not to pay attention for a set period of time (two days? a week? a month?). Often the best way to avoid making a bad decision is to give yourself enough time to regain your perspective. (This works quite well with arguments with your spouse as well.)
• Review a list of market disasters and subsequent market performance. The broad market indexes have been remarkably resilient through some of the worst disasters imaginable—let alone those that never materialized. It is reassuring to keep handy a collection of panic-inducing events that proved to be temporary setbacks (versus Japanese stagnation).
• Reread an article that restores the proper mind-set. Having some convincing articles handy on the long-term performance of equities is a good idea. Reading the article also has the added benefit of a 15-20-minute time out in cases when market emotions become overwhelming.
• Write down on a piece of paper a predetermined list of reasons to maintain your plan. Short-term emotions skew our perspective and often cause investors to become momentarily disoriented and abandon sound plans. Getting that rational perspective down on paper, in the form of a list of “reasons we need to stay invested for the long term” or “reasons why we have to stick to the plan,” and reviewing it during difficult times is a powerful tool that brings people back to a rational state of mind.
• Review a 100-year chart of market performance. For more visual learners the ability to see with their own eyes the remarkable history of market returns is a particularly powerful tool for overcoming jitters in volatile/bear markets.
Step 5: Do Something!
While sticking to a good plan is of course important, it can be necessary and advisable to take some action with our investments to help us feel better. Sometimes even a symbolic step is enough to mitigate our fears and increase a sense of control. As part of the F-SMaP, include small measures that you will take to relieve the mental pressure, such as selling a small fraction of a losing position, or moving from cash to a money market fund. Investing works on the same principle as steam pipes; a predetermined pressure release that does not meaningfully affect the system is what prevents the big explosion down the road. Let off some steam. Take an action to make yourself feel better.
Another point to consider is that volatile markets present the best opportunities to boost performance for those who are prepared. The ability to reframe a negative (“bad” market) into a positive (buying opportunity) is an essential part of the F-SMaP.
Revisit some of the good businesses you considered before that just seemed too expensive. Even if the previous plans are no longer appropriate, down markets inherently provide opportunities to buy at good prices.
Step 6: Commit to the Plan
This final step is subtle, but important. Verbal agreements are good, but are rarely enough to ensure follow through in forging new habits. There needs to be some ceremony to the procedure, some overt sign of commitment, if the plan is going to retain its impact.
One of the best ways to increase this impact is to sign and date the plan and have a witness (e.g., a partner or, your financial advisor) do so as well. Our innate instinct to have our actions match our words is a powerful one. It is amazing how signing your name to an agreement increases commitment and compliance.
It also adds an air of ceremony to the agreement that makes it feel more “official.” In this vein, care and respect for the presentation is also of genuine importance. A hastily printed up Microsoft Word document may command attention. But a crisp document pulled from a designated folder that says, “F-SMaP—Emergency Protocol” (or some such) in raised lettering commands much more respect. (Remember, the content of the plan is a tool, but the process of using the plan is also a tool.)
Involving another person in the process of creating an F-SMaP is highly advisable because it is always easier to keep our word when we are accountable to someone else.
Remember, the F-SMaP is a tool to be periodically revisited. So it may pay to go over it once a year to ensure that it is still as applicable as it was when it was created.
How do you typically cope with stress?
If you have good, healthy coping mechanisms already, then great. It’s a matter of employing them. But if you don’t, it’s important to identify sound practices that can blow off steam, and reset your perspective back to the way it needs to be.
Creating a Crisis Plan
We know that fear is the dominant investing emotion and that combating it is essential for long-term investing success. But fear is what’s called an “anticipatory” emotion. When we feel fear, we may be worried by our present circumstances, but the emotion is future-focused. To be fearful is to be afraid something bad is going to happen. I’m going to fail the test. The plane is going to crash. My net worth is going to get slammed.
As such, fear is often a healthy and appropriate emotional reaction. If you were living on a small island and suddenly learned that a seismic event had put you in the path of a massive tsunami, or if you were enjoying an afternoon at the zoo and were informed that a 600 lb. tiger had escaped its cage, you should be afraid. In both cases that fear would lead you to a highly adaptive behavior, namely, to escape. With all the emphasis on the dangers of fear, its value is often underappreciated. Without the emotion of fear, our species—let alone our portfolios—would have died out long ago.
But while fear can be adaptive and manageable, its subsequent emotion—panic—is not. Panic is a state of utter confusion compounded by a crushing sense of immediacy. Fear can lead to good decisions. Panic will not. Think of it this way: Fear is being afraid of falling overboard; panic is the sensation of drowning.
Part of the value of a good F-SMaP is its role in preventing fear from turning into panic. Let’s use another scenario as an analog to illustrate the concept.
In New York City, in the weeks after the 9/11 attack, there was an increased fear of terrorist attacks, particularly attacks with weapons of mass destruction (WMDs). In an effort to combat that fear, there was a movement toward preparedness. One such recommendation that gained popularity was to assemble an “emergency kit” that could be broken out in case such an attack took place. And so a number of New Yorkers bought emergency kits or assembled their own out of readily available supplies such as food, water, radios, breathing aids, and so on.
Cynics, many of whom were in the media, scoffed at the idea. “A gas mask? Bottled water? Batteries? A map? You’ve got to be kidding?” they asked. “If the city were hit with WMDs, none of those things is likely to save you!” Some called it not only a pointless exercise, but a silly one.
Those people were wrong. Maybe an emergency kit would not save your life. (Then again, maybe it would.) But perhaps the greatest value of the emergency kit is that those who have one are much less likely to panic. Not only would they have some emotional preparedness through their anticipation of the catastrophic event, they also equipped themselves with some supplies, as well as a basic plan on how to survive. (Similarly, people like to make fun of the old “duck and cover” campaign that taught kids to sit under their desks should there be an aerial bombardment. Would they prefer a school full of kids running around screaming like banshees?)
It’s important to remember what happens in a crisis; people panic, and panic causes irrational, impulsive decisions, often with a herd mentality. In such situations there is great psychological stress placed on us. Our brains are not operating at 100 percent efficiency and mental energy is in precious supply. It is incredibly valuable not to waste that mental energy answering the question, “Holy crap! What do I do now?” Having a sense of control, having a plan allows you to make good decisions, resist the mob mentality, and keep your head. That is, at its core, the difference between panicking or not.
Part of your F-SMaP should include a crisis kit, the functional equivalent of a little supply box kept in a handy location that says “In the event of an emergency, break glass and remove contents.” It should contain information and instructions in the form of defensive maneuvers to be taken.
The following items should be included:
• Website information on how to access accounts (Note: For those who do not want to write down sensitive information such as passwords, make sure you provide very clear clues so that you can easily recall log-in information.)
• Phone numbers of key people to call, including financial institutions and personal advisors (financial, legal, etc.)
• Statistics. It can be difficult in the moment to get an accurate reading of “how bad it is.” Having handy the percentage drop and recovery figures for past market moves will give you a better handle on the situation and lead to clearer thinking.
• Specific plans of action (e.g., in the event of an increase in interest rates over 10 percent, I will withdraw X dollars and put them into a utility stock fund).
A plan is the antidote to confusion. It provides direction and a sense of control. Please see
Figure 7.1 to begin formulating your financial stress management plan.
Conclusion
We hope you’ve learned some causes of investment stress and techniques for preventing or overcoming them. We’ve shared some techniques for combating financial stress that we hope you’ll find useful:
• Immediate stress relief: Consider breathing techniques, vigorous exercise, or some of the other tools suggested on page 159.
• Long-term stress inoculation: Develop lifestyle habits that reduce your sensitivity to stress. Limit news and information overload; practice regular prayer, meditation, or yoga; exercise; good sleeping habits; and eat a healthy diet.
• Prepare in advance for stress: Create an FSMaP and schedule periodic meetings to review your investments, various contingencies, and your plan for dealing with them.
• Consider using a professional financial advisor or coach to run ideas by and to help you “offload” investment stress. For example, recent neuroeconomics research demonstrates that receiving financial advice can relieve the mental and emotional burden of investment decision making.
22 In the next chapter we weave together the material you’ve learned thus far to help you design a plan for moving forward with confidence and clarity.
