Key Takeaway: It can be easy to get caught up in market turmoil—but also harmful to your long-term goals. Take the time to learn which high-energy, high-emotion experiences cause you to react so you can maintain your poise in all kinds of market conditions.
When market waters get choppy like they have recently, it’s easy to feel as though you’re sinking. Many people overreact—read: panic—and hurt their financial goals by selling off investments or taking other shortsighted actions. Even the daily movement of markets, the gentle ups and downs, can cause us emotional turmoil.
In my years as an advisor, I’ve seen how people’s emotional reactions prevent them from moving into a position of strength. That’s too bad because it is in the position of strength that people can better control their emotions and thus achieve better investing outcomes.
This position of strength is also called emotional competency, and it’s what separates high performers from low performers. In golf, for example, emotional competency is the person who can make the 5-foot putt for the championship. In investing, it is the person who refuses to give in to panic when markets drop.
Whatever the profession, emotional competence depends on your ability to perform in stressful situations. Take a look at the following diagram:
When we’re in Quadrant 1 (Q1) or Quadrant 2 (Q2), our bodies are in a highly energized state, which can affect our ability to make sound decisions. In Q3, our energy and emotional levels are low. They are so low, in fact, that some people experience depression, which can also affect decision-making. But Q4? That’s where good things happen. Our higher emotional levels paired with our control of our energy can lead to creative yet rational decisions.
But how do you get to and consistently stay in Q4? It takes practice. You can start by playing the freeze game, a game I learned from Doug Lennick, CEO and co-founder at think2perform. Six or eight times a day, stop what you are doing and focus on how you feel. What is going on around you, and what are you thinking? How are your breathing and heart rates?
For example, if someone cuts in front of you at the supermarket, freeze for a moment and do an inventory. Are you feeling anger, fear, a desire to tell them off? Maybe your blood pressure shot up, and your breathing got shallower. Understanding your reactions can help you control them.
This control is necessary in investing, especially when the headlines have you believing that everything is out of control. You don’t want skyrocketing blood pressure. You don’t want to hyperventilate. You want to remain calm so you can stick to your long-term plan.
Sometimes I play the freeze game while watching the news about the latest market drop. Over the years, I’ve noticed that I’ve become much less agitated and have even turned those days into buying opportunities.
We cannot control our emotions all the time; however, we can use the freeze game to learn more about which high-energy, high-emotion experiences cause us to lose control. By learning about our biases, we can react less and respond more. We thus improve our decision-making while maintaining our poise, no matter what the news reports say.
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.