Behavioral and Psychological Strategies for Managing “Stock Market Stress”
The gargantuan fluctuations in the markets these last few weeks, recently ending in positive territory, at least in North America, has sensitized me to the comments I’ve heard from friends, family and colleagues regarding the significant stress these circumstances have caused them. After some consideration, I reminded myself of the adage that, for the most part, stress is self-induced and not the result of events in the external environment.
What do I mean by “self-induced stress”? Faced by the same circumstance, whether desirable or undesirable, no two people react the same way. If, for example, you were a short seller and successfully picked oil and gas to drop, you would be very happy camper right now. On the other hand, if you owned oil & gas stocks, there is a pretty good chance that you would be feeling quite stressed by the current circumstances. Your sleep might be disrupted, you might wonder if you should sell what you have – or buy more – and you may be increasingly hostile towards the Saudis for increasing production.
So, I decided to write this article for those of you who now perceive the Dow, the S&P, NASDAQ, CNBC, BNN, The Wall Street Journal, The Globe & Mail, Fortune Magazine, Money Sense, and Cramer, etc., as toxic stimuli. Of course, these stock market related entities are merely information providers and not your source of stress. That said, I am well aware that there quite a number of you who would rather watch Jaws before going swimming in the ocean than the seeing the colour red on CNBC market reports.
My purpose in writing this article is to provide you with some behavioural and psychological suggestions to help manage the stress associated with stock market fluctuations, and even avoid this stimulus as a source of stress altogether. I’m not going to recommend you avoid investing in equities. That’s like saying if you are afraid of heights or public speaking, don’t ever go above the first floor of a building or speak in public. That’s not managing stress, that’s stress avoidance. Some of the recommendations will likely sound familiar to you. If that is the case, and you suffer from excessive stock market stress (SMS), then it is high time you put these ideas into practice. I say “excessive” SMS, because some stress is indeed inevitable, and even desirable. To some degree, stress is correlated with greater alertness, sharper thinking, better decision-making and so on. However, when
you have difficulty eating or sleeping, you can’t stop your mind from racing, you become demoralized and depressed, irritable, possibly hostile towards inanimate objects and stray dogs and cats, your sex drive does a dive, then chances are you are on the wrong side of the stress curve.
1. Don’t invest in the stock market unless you are prepared to study how the markets work. Even then, there appears to be very few people who are certified experts in market behaviour. With all the research available to your broker and analysts, they are likely as often wrong as they are right. With the plethora of information available to all of us, if you were to become a serious investor and read the available material, you would likely be just as successful following your own advice. Don’t place inordinate faith in your broker. Listen to their advice, but always do your own research regarding their advice.
2. Don’t bet the farm. That’s not called investing; that’s called “gambling”. If you heard that Alibaba is going public and you subsequently take the majority of your investment dollars and apply it to that one company, that’s like putting all of your hard earned money on red in Las Vegas. You may come out ahead some of the time. On balance, however, combining appropriate levels of risk with prudence will in the long run prove to create more consistent outcomes. Hitting singles, doubles and triples is a far more effective strategy than going for the long ball.
3. Don’t put your faith in your broker. They make money whether you do or not. They are putting their kid through college, not yours. This isn’t to say that they aren’t genuine, sincere or trying to the best job possible to advise you correctly, but read the fine print. They aren’t listed as “experts”; they call themselves “advisors”. Do your own homework (similar to #1 above).
4. Don’t follow tips or “gut feelings”. In the age of Twitter and Facebook, by the time you hear about a tip, chances are so has half of the world. Successful investors follow a success formula that works for them and they stick with it. Las Vegas does not like bettors who follow the same rules as they do; they prefer people who bet emotionally or on “hunches”. Did any of you have a “hunch” that oil would drop by 50% in 6-8 weeks? Do you think that Buffet invests in something when he hears about it from his brother-in-law? I seriously doubt it, especially since he likely employs several hundred analysts who use models, formulas, interviews, site visits, etc., before making a move. And he does this when he can afford to lose!
5. Practice for a year first. The majority of people who enter the market have probably spent more time planning a week’s vacation then investing thousands of dollars in the stock market. Create a phantom portfolio based on solid research. Play it out for a year. Or, open a personal trading account where fees are as low as $6.95 a trade, put a few thousand dollars into it, and practice for a year.
6. If a broker recommends a particular investment ask whether they have invested too. If the answer is “no” then don’t. Or at least ask why they haven’t.
7. Don’t assume that your broker is tracking your investment portfolio. Chances are they aren’t, unless you are in their top 10% of investment clients. Read the monthly reports you get from your brokerage or investment advisor’s firm. Don’t give your broker carte blanche to trade within your portfolio without your knowledge or participation. Many of them are compensated by buying and selling. Don’t feel as though you are imposing when calling your advisor or broker to discuss your portfolio in order to make adjustments. That is why they earn hefty commissions.
8. Ask your broker or advisor when they recommend a particular investment whether they are receiving a special fee or incentive for promoting that investment. If so, assume that the incentive is large and that they are likely depending more on the advice of the company who created the investment than their own research. If, on the other hand, they can demonstrate that they themselves have researched that advice thoroughly, then they are entitled to the incentive and if you agree and the recommendation fits with your strategy, go for it. But refer back to #2 above.
9. Invest in companies and industries you know something about. Yes, there is an “amazing” future in stem cell research and biotech firms, likely in your great grandchildren’s time. Stick with what you know. Or, stick with
companies that have a long term track record of success and multiple products in the marketplace. Remember, most companies do not survive beyond 50 years, and, most start-ups don’t make it past 5 years.
Now, let’s assume that you have practiced with a phantom or limited portfolio for a year, and set aside X amount of dollars for serious investing that is sufficient to make it interesting but not enough to scare the heck out of you. You have decided on an investment advisor, you subscribe to several newsletters and great investment advice sites, perhaps joined an investment club and now feel ready to go.
You create a portfolio based on your level of risk tolerance ranging from ultra conservative (in which case you likely have decided to skip the markets altogether) to suicidal (in which case your hobbies consist of hand-over-hand cliff climbing without ropes because you love to confirm how clever, strong and agile you are). You stick with companies and/or industries that you either know something about or have diligently studied for the past year. Maybe you have even called on a few executives in those companies to have a chat regarding investing in their companies.
Your portfolio is experiencing some nice gains, and whamo, Putin decides it’s time to re-annex Poland and Hungary, and puts troops on their borders, or some such thing (pick your scenario). Everything goes to hell in a hand basket and the markets drop like a lead balloon. Here are some typical psychological/emotional/behavioural reactions: selling low, firing your advisor, ruminating, watching CNN excessively hoping the news will change after the next commercial, changing channels because FOX has the answer as to how to handle Putin, calling yourself derogatory names, calling others derogatory names and so on.
Yet, these reactions do not occur in a vacuum, and as you recall, is not typical of all those who are invested in the markets. These reactions are fairly typical of those whose irrational interpretation of events predispose them to reacting adversely.
Typical categories of counterproductive, irrational thought patterns which trigger these excessive emotional and behavioural reactions (SMS) consist of the following:
1. Catastrophizing. This form of thought process is characterized by words and phrases such as “I have lost (or will lose) everything”, “I will never recover”, “I am a totally inadequate investor and should never have entered into the stock market”.
2. Absolutistic Thinking. This type of thinking is represented by such clever phrases as “Putin shouldn’t have grandiose plans”, “this isn’t fair”, “the Western governments should protect my investment”.
3. Labeling (or Mis-labeling). “Wall Street are a bunch of crooks”, “my advisor is useless”, “the markets are rigged”, “I’m stupid or at best inadequate”.
4. Crystal Balling. “The markets will never recover”, “I will never recover”, “the world as we know it will disappear”.
Engage in these forms of thinking and your stress level will go through the roof. Furthermore, actions mediated by excessive stress are not only equally irrational to the irrational thoughts which created them but frequently beget more undue stress. So, you can take a positive situation and turn it into a negative or take a challenging situation and make it even worse simply by how you chose think and act in relationship to this situation. A realistic appraisal of the situation suggests that even after depressions, recessions, or major market dips, at the very worst you will not have lost everything you invested. If you invested in good companies, they will recover.
Although there are crooks on Wall Street, it’s unlikely they called Putin and suggested annexation of Poland. And, the world ultimately responds to guys like Putin and the markets recover. You are no smarter or dumber now than you were when the drop in markets occurred; you simply aren’t in a position to control all external factors which impact markets, no matter how much you try. That’s why it’s called “risk capital” and not “sure thing.”
If you see merit in learning to manage your thinking so as to not inflate your stress response to unmanageable levels, I recommend that in addition to studying the markets before investing that you also study some principles of rational thinking. As a starting point, here is a link to a YouTube excerpt of an interview with Dr. Albert Ellis, which in part is humorous, a bit therapy oriented, but highly insightful and adaptable to the discussion which we just had on stock market stress.
(From Wikipedia) Albert Ellis (September 27, 1913 – July 24, 2007) was an American psychologist who in 1955 developed Rational Emotive Behavior Therapy (REBT). He held M.A. and Ph.D. degrees in clinical psychology from Columbia University and American Board of Professional Psychology (ABPP). He also founded and was the President of the New York City-based Albert Ellis Institute for decades. He is generally considered to be one of the originators of the cognitive revolutionary paradigm shift in psychotherapy and the founder of cognitive-behavioral therapies. Based on a 1982 professional survey of USA and Canadian psychologists, he was considered as the second most influential psychotherapist in history (Carl Rogers ranked first in the survey; Sigmund Freud was ranked third).
And, above all else, good luck.
Gerry is an Industrial/Organization Psychologist with 43 years of practical
experience, first in a variety of clinical settings and exclusively in industry
beginning around 1979.