The Long View: Navigating Financial Uncertainty with Calm

By: Carol Cho, CLU®, ChFC®, BFA™

Raise your hand if you've been breaking a sweat checking your investment accounts lately. 

You've heard countless times: focus on the long-term and avoid doing anything irrational. But it's so hard to shake off the feelings of stress, fear, and anxiety these days. It's like a fire alarm is continuously blaring in your brain. And rightly so - it’s been a wild year, and it’s only March! I have yet to talk to someone who is not feeling anxious on some level about what’s going on in the world and their financial situation. That’s why I often, admittedly, steal the phrase, “Money is not in the math department but in the psychology department.”

It's not just the numbers that set off that alarm in our brains, but what we are feeling, reacting to everything that’s going on in the world. These alarms signal danger, real or perceived, and are evolutionarily designed to keep us alive — to survive, not necessarily to thrive. Our primitive brains have a difficult time distinguishing between a real-life bear attack and a financial threat, such as a bear market.

The Illusion of Control...

To escape this bear attack—I mean, a hypothetical bear market—your brain urges you to act. Some people silence that alarm by panic selling. Once they do, they feel a sense of relief. Taking action, any action, even if it may not align with their long-term best interests, is empowering because it provides a sense of agency and control in a world that feels out of control.

This psychological bias is called the Illusion of Control, which occurs when people overestimate their ability to manage events, such as believing that their personal actions can significantly influence outcomes that are largely shaped by external forces. In the case of panic selling, you think that by acting, you are exerting control over the uncontrollable, which temporarily alleviates your anxiety and stress, and the alarm in your brain quiets down for a moment.

Let’s take a look at this infographic showing how three different investors reacted to market turbulence and the long-term effects on their portfolios: 

Investor A panicked, exited the stock market, switched to cash, and vowed never to invest again.

Investor B also panicked, exited the stock market, but reinvested when the market started to recover.

Investor C might have felt panicked, too, but held firm to her long-term goals and remained invested.

We've existed for around 300,000 years, but the S&P 500, as we know it today, has been around for way less! Since 1957, making it only 68 years ‘young’ this month. We're wired to survive and to be cautious. We're wired to react quickly to threats and to prioritize immediate safety over long-term benefits. We're wired to follow the crowd, thinking there's safety in numbers. So why would we be good at this? We are NOT wired for investing.

The Cost of Worry: How Stress Impacts Rational Thinking

Worry and stress don't just feel bad, they literally cloud our judgment. When we're stressed, our body reroutes oxygen and blood flow away from the brain's frontal lobe, which is responsible for rational thinking and decision-making, to areas that manage the fight-or-flight response. This physiological shift means that under stress, our capacity for thoughtful analysis and making rational choices is significantly reduced.

What can a human being do in times like these?

• Embrace Calmness for Better Decision-Making: It’s crucial to engage in practices that reduce stress and promote calmness, like deep breathing exercises, regular physical activity, and mindfulness and meditation. This will help get blood flowing back into your prefrontal cortex and enable you to think more clearly and rationally.
• Stay Informed, Not Obsessed: Keep an eye on the market trends without checking your accounts excessively. This helps in making informed decisions without the pressure of sudden swings.
• Revisit Your Financial Goals: Reflect on your long-term financial objectives rather than reacting to short-term market fluctuations. This perspective can help anchor your decisions.

Navigating the complexities of the financial markets can feel overwhelming, especially in turbulent times. However, remember that panic and worry cloud judgment, leading to hasty decisions that may not serve us well in the long run.

As we navigate the ever-changing tides of the financial markets, remember that true wisdom lies in maintaining our composure and keeping our eyes on the horizon. By embracing calm and focusing on our long-term goals, we transform today's challenges into tomorrow's triumphs.