Note from Senior Managing Editor Christina Grieves: Today’s article comes from our good friend Dr. Joel Wade – author, life coach and one of our favorite contributing writers here at Liberty Through Wealth. The topic he’s covering today is one that every investor needs to understand: how emotional reactions can affect your investment returns.
I hope you enjoy reading it as much as I did. Investor psychology is a frequent topic at The Oxford Club, and it’s one that affects every single investor. In my opinion, one of the biggest benefits of our trading research services is our clear-cut approach… Our experts’ powerful strategies and timely “Buy” and “Sell” recommendations take emotions out of the equation completely.
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My friend Chris is a smart guy.
He researches his decisions, getting good advice and ideas from some very sharp people.
He carefully plans his investment strategies. And he knows how to stick to those strategies over the long term, through the usual ups and downs of the market…
Most of the time.
But every once in a while, he gets thrown off track. Sometimes in disastrous ways.
He thinks he’s “following his gut,” making bold decisions in tumultuous times. But later, it becomes obvious what actually happened.
(Hindsight’s annoying that way.)
In reality, Chris was following a primitive part of his nervous system designed to protect us from physical attack by a predator or an enemy.
These days, of course, few of us are ever faced with the life-or-death experience of being hunted by a predator in the wild. We hear stories of the occasional mountain lion or bear attack, but these stand out because they’re unusual.
We’re more likely to be faced with a human predator. But violent criminal interactions are much rarer now than they were for our ancestors, even with the rise in crime over the past year or so.
Yet we still feel threatened in other ways. And one of the most primitive fears that many of us experience has to do with money.
Money is crucial in today’s society. It can make the difference between abundance and scarcity, serenity and stress, peace of mind and deep anxiety.
So when we invest, it’s not just about numbers on a spreadsheet. It’s also about the most primitive parts of our nervous system.
It’s about our quality of life.
Most of us can weather mild drops in our portfolio, knowing that with sound principles and strategies, chances are we will recover fairly quickly.
But when we’re hit hard… when it looks like an investment we were counting on is losing in a big way, our primitive nervous system kicks in.
Once that happens, higher brain activity is compromised.
Emotions vs. Reactions
Here’s where it’s important to make a distinction between emotions and reactions…
Our emotions – fear, joy, sadness, anger, delight – are primarily about learning, growth and the future. They give us feedback about different situations and interactions.
But reactions are more primitive and emanate from our nervous system.
This is our fight-or-flight response, designed to protect us from an actual physical attack. It gives us the energy and focus to fend off an assault or to escape.
But these primitive reactions often get melded together with emotions.
You think you’re angry, but really you are enraged, the energy in your systems mobilized to fight a predator.
Or you think you’re afraid, but what you’re really feeling is the intense energy to escape a dangerous situation.
While our emotions can help us think clearly, our reactions completely disconnect us from our higher brain function.
When we’re in our sympathetic nervous system, we’re scanning for danger. We’re subject to polarized thinking – win or lose, right or wrong, good or bad.
This is no time to try to resolve a personal conflict… or make an important investment decision.
This is the state of mind that got my friend Chris in trouble again and again.
Mastering Emotions and Reactions
When he was thinking clearly, Chris was competent and successful. When he was feeling emotions, he was able to pay attention and learn from them.
But when he was experiencing a fight-or-flight reaction, it was always disastrous.
When an investment dropped suddenly, he’d sense danger and react with fear and rage, often quickly selling a stock that he should’ve held on to through a short correction.
In social situations, he’d blow up at people, thinking that he had to set them straight for the wrong they’d done to him (or so it felt from his primitive reaction). This damaged many of his relationships.
Once the intensity subsided and he realized what he’d done, he’d apologize. But the trust had been broken, and he found that people he needed would be a bit more distant, a bit less available to him.
Until we had a talk.
I sent him my new course, Mastering Emotions, Moods and Reactions. And we came up with a strategy to help him when he felt the beginnings of his fight-or-flight system coming on.
Once he understood the difference between an emotion and a reaction, he could view his experiences – both personal and financial – in a clearer light.
Recognizing that nothing rational emerges from the sympathetic nervous system, he started to understand how his reactions felt different physically from his emotions.
Reactions evoke predictable qualities: scanning for danger, a heart rate above 100 beats per minute, an intensity of energy, and polarized all-or-nothing thinking.
If Chris noticed these signs, his next step was to remove himself from the distressing situation.
Sometimes he needed 20 to 30 minutes. Other times, a day or two.
The key was to not react impulsively. To wait until he reached a calmer, more rational state of mind.
Once Chris was no longer experiencing the fight-or-flight reaction, he could think clearly and decide what he really needed to do.
That one difference saved him a lot of money. Made him a lot of money.
And salvaged some important relationships, too.
Joel F. Wade, Ph.D., is a contributing writer for Liberty Through Wealth. He is the author of The Virtue of Happiness, Mastering Happiness and his new course, Mastering Emotions, Moods and Reactions. He is also the host of The Mastering Happiness Podcast. Joel works with people around the world as a marriage and family therapist and life coach. Visit his website to receive a free Learning Optimism e-course.