31 March 2008
As the market fluctuates daily and the media keeps telling us to be interested in those daily moves, what are you doing about it? The inclination for many is to do something, anything, just to make it feel like there is control in this short-term uncertainty. But when I pose this same question to some of our top money managers, the answer is more optimistic – whenever there is fear the best money managers look for bargains and focus on the long-term, often preferring to do nothing than something in the hope of looking busy.
In Jason Zweig’s book, Your Money & Your Brain, the author points out the difference between your reflexive and reflective brain. The reflexive brain is that portion of our brain that quickly, or reflexively, tries to comprehend information coming at it in an attempt to categorize and deal with new information. I liken it to what we call a gut feel, intuition or even using our hearts to make decisions. The reflexive brain function is all about speed, sometimes taking only one-tenth of a second to respond – it is why we all avoid car accidents.
The reflective part of our brain, however, is used for solving complex problems, using your personal lifetime historical references to help make decisions. This part ofüüour brain is the backup system that allowüs us to solve problems our reflexive, or emotional, brain gets stumped with. The reflective brain is the analytical thinking we all need to make good decisions; decisions that often can be made quickly but might be made incorrectly if left totally up to our reflexive brain.
Understanding that our brains process information in two different speeds, one more emotional and one more analytical can help to slow us down when someone on television tells us to buy/sell now. We literally need to fall back on our discipline so that our decision-making does not become sloppy.
In volatile markets like today every investor must relate back to the basic tenets that got them to where they are: First, decide on a course of action that creates a portfolio you can live with for at least five years – no cheating on this. Once put in place, do not have the hubris to think you see something so totally unique that you can beat the market; and second, rebalance all investments back to their original weighting once a year to compensate for market movement. If, after five years, a goal or your risk tolerance changes, then remix your overall portfolio. But give it at least that long to participate in the ups and downs of every business cycle. In effect, let your reflective brain do the work and your reflexive brain keep you out of car accidents.