OPINION: Managing your money effectively requires managing pressure's two root causes: uncertainty and lack of perspective.
When it comes to investing, how we navigate a handful of periods of extreme volatility can make or break our success over decades. And yet, the pressure of these moments often leads us to make rash decisions that we regret later—selling when we should hold or buying when we should stay on the sidelines. In sport, they call this choking.
Managing uncertainty Uncertainty is at the root of the discomfort of pressure because the human brain experiences uncertainty like physical pain. In fact, an experiment conducted by researchers at University College London demonstrated that people exhibit fewer signs of physical stress when they have a 100% chance of getting an electric shock than when they have a 50% chance of the same shock.
Plan your criteria for action in advance—When I interviewed trauma physician Dr. Andrew Petrosoniak, he talked about the importance of the 5 or 10 minutes his team has between learning that a patient is on the way and having them arrive at the hospital. During that time, they review key decision points that might arise and determine how they will handle them: “We say, ‘OK, if the patient does not have a pulse or they lose a pulse, we are going to do X.
If he checks it monthly, however, he’ll have eight good months against four bad ones, and—even better—if the dentist only reads the year-end statements he is likely to have 19 good years against one bad one. In short, as frequency increases it becomes much harder to distinguish the long-term trend from general volatility—and we are much more likely to respond emotionally to each and every twitch.
When we mentally expand the stakes of a market correction from a temporary loss of net worth to a threat to our livelihood, it can lead us to panic and make decisions that in hindsight we regret. Many who liquidated assets in 2001, 2009, and most recently with the onset of COVID in March 2020, learned this the hard way.
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