Two of our clients sold all their investments when the markets corrected during the Covid pandemic, right at the bottom of the market. We relentlessly tried to persuade them not to sell their investments. One of them was amongst our first few clients of Fincart. We went beyond our general practice to lend him money to bridge finance his cash flow, yet he exited the market much to our dislike. They were under the grip of “Fear”.
Fear is a powerful emotion; quoting, Mr. Bertrand Russel – a British Mathematician, a Philosopher and a Nobel laureate.
“Neither a man nor a crowd nor a nation can be trusted to act humanely or think sanely under the influence of a great fear…To conquer fear is the beginning of wisdom.”
The Amygdala
The concept of fear is deeply rooted in the emotional and psychological responses triggered by sensing any sort of danger, suspicious things or anything that is scary. Deep in our brain lies a part called, “Amygdala”. When faced with any risk this part of the brain acts like an alarm system triggering fast emotions like fear and anger. The fear of loss of money triggers similar emotions – the fear of loss of money gets processed in the same part of the brain that deals with death & mortality.
Impacts Decision-Making
When the Amygdala gets fired up, it hijacks the prefrontal cortex, responsible for logical reasoning. During periods of heightened fear, investors may be more prone to impulsive actions, such as panic selling or avoiding the market altogether.
Herding Behavior
On the other side what makes people invest at the market peak. Fear of missing out (FOMO) or fear of being left behind can drive herding behaviour. Investors may follow the crowd during market upswings, driven by the fear of missing out on potential gains, or panic and sell en masse during downturns, fearing further losses.
People reacting in such a manner is absolutely normal, that’s our natural response to an unforeseen drastic event. Having said that, these reactions cost money.
How can we train our brain to avoid behavioural blunders:
When confronted with risk, the amygdala will function like an accelerator pedal, revving up the emotions. Fortunately, the prefrontal cortex can act like a brake pedal, slowing you down until you are calm enough to make an objective decision.
Cultivate Mindfulness
Mindfulness techniques, such as meditation and mindful breathing, can help individuals become more aware of their emotional responses to market volatility. By practising mindfulness, investors can develop a greater sense of calm and make decisions with a clearer, less fear-driven mindset. Distracting from the news is another way to cool down the flaring emotions – so go for a walk, listen to music or play with your kids.
Educate Yourself
“Risk comes from now knowing what you are doing” – Warren Buffett. Knowledge is a powerful tool against fear. Educate yourself about the principles of investing, market history, and the inevitability of market fluctuations. Understanding that volatility is a normal part of the market can reduce the emotional impact of short-term fluctuations.
Create a Financial Plan
Develop a comprehensive financial plan that includes emergency funds, insurance, and a disciplined investment strategy. Knowing that you have a solid financial foundation can alleviate the fear of unexpected events impacting your finances. Establish clear, realistic investment goals that align with your financial objectives and time horizon. Having a well-defined plan can provide a sense of purpose and direction, reducing the fear of uncertainty.
Research before investing
Investing after doing a thorough research based on fundamentals will add conviction to your investment. Temporary fluctuations in prices or NAV can give you reasons to buy when the sentiments are down.
Focus on the Long Term
Adopt a long-term perspective when it comes to investing. Understand that markets go through cycles, and short-term fluctuations are part of the journey. Focusing on long-term goals can help mitigate the fear associated with day-to-day market movements.
Diversify Your Portfolio
Diversification helps spread risk across different assets, reducing the impact of volatility on your overall portfolio. By having a well-diversified portfolio, you can mitigate the fear associated with the performance of any single investment.
Seek Professional Guidance
Consult with financial professionals to gain insights and guidance. A financial advisor can provide perspective, help you stay disciplined, and guide you through market volatility, reducing the fear of making uninformed decisions.
By understanding the emotional and psychological aspects of fear in investing and implementing these strategies, investors can train their brains to approach market volatility with resilience and make more informed decisions based on their long-term financial objectives.
“Nothing in life is to be feared, it is only to be understood. Now is the time to understand more, so that we may fear less.” ― Marie Curie.
Credits & Disclaimer: Excerpts of the content have been picked up from the content published by Jason Zweig – an American financial journalist. He has been a columnist for The Wall Street Journal since 2008. Mutual Fund are subject to market risk, please read the offer document carefully before investing.
