Key Takeaway: When the markets act like a rollercoaster, we may feel like we need to get off the ride, like, right now! But we might just need to do the opposite. A more reflective perspective can help us ride out the short-term market rollercoaster toward our long-term financial goals.
With the up-and-down market fluctuations over the past couple of months, you may be feeling like you need to do something—anything–about your investments. Watching the news can increase that internal drumbeat you hear: Act now, act now, act now! But is acting (or really, reacting) in your best interest? Your answer may come down to what part of the brain you listen to.
A while back, I read Jason Zweig’s book Your Money & Your Brain, which looks at how our thoughts and emotions drive our financial behavior. One of the takeaways from the book is the difference between our reflexive brain and our reflective brain.
The reflexive brain acts on reflex. It’s behind the gut feelings we get; it’s what we call intuition. The reflexive brain is all about speed. If you’re about to get in a car accident, it’s your reflexive brain that will send lightning-fast signals to your hands and feet, ordering them to turn the wheel or brake or whatever you must do to avoid the crash.
Obviously, our reflexive brain is crucial to our survival. But reflexive action can also get us in trouble with our investments. No matter how “right” our gut feelings may seem, they aren’t foolproof. And in times of market dips and even corrections, those feelings can be counterproductive, forcing us to behave rashly and hurting our long-range plans.
Indeed, I’ve long observed that the best money managers seem to be optimistic during times of market uncertainty. Yes, they will look for investment bargains, but they might end up doing nothing at all. They’re not reacting from the reflexive part of their brain. Instead, they’re working from their reflective side.
The reflective brain’s function is to reflect. We use the reflective brain to solve problems, drawing on our lifetime of experiences to analyze our current challenges. Our reflective brain offers the analytical know-how to make good decisions. It allows us to bypass shortsighted, reflexive-driven behavior in favor of decisions that benefit us in the long term.
The reflective brain is what we should draw on as investors, especially when markets get volatile.
I always counsel my clients to adhere to three investing tenets when we design their portfolio:
Decide on a course of action that creates a portfolio that you can live with for at least five years.
Don’t try to beat the market, and rebalance your investments annually to compensate for market movements.
If, after five years, your goals or risk tolerance have changed, remix your portfolio to reflect those changes.Following these principles helps give clients the wherewithal to withstand short-term market swings. And it bypasses the reflexive brain to put them solidly in their reflective brain.
When markets start seesawing, you can help ride out the volatility by letting your reflective brain do the work and using your reflexive brain to continue keeping you out of car accidents.
The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.