Market View (January 2019) – This Might Sting a Little

by Daniel Yu, CFA®, AIF®, REDW Wealth

“This might sting a little,” “You might feel some discomfort,” “You might experience some pain,” these phrases are meant to prepare and supposedly ease imminent pain from a needle or other medical procedure, but somehow they often do not.  I suspect that as you read those phrases you almost immediately remembered an unpleasant experience.

The fourth quarter of 2018 was a difficult quarter with equities declining.  The declines were particularly severe in December and it was easy to imagine a return to the declines of late 2008 and early 2009.  Some might have been near to experiencing an amygdala hijack.  Daniel Goleman coined the term “amygdala hijack” to describe an emotional response to outside stimulus that is immediate and overwhelming.

In the wealth management world, investors can experience this kind of emotional response as they look at the news and their investment portfolios.  When one has a true amygdala hijack, the responses can be so extreme that the long term plan for wealth management is thrown aside in favor of more impulsive actions like moving everything to cash. What are some strategies that can mitigate and hopefully prevent an amygdala hijack?

  • First, make sure you have enough in savings. A lack of savings can be a subtle, emotional weight or worry that magnifies market volatility. Over the years, many practitioners have advocated having 3-6 months of basic expenses (housing, food, etc.) in the bank, so that when the inevitable correction comes, you are not viewing your falling investments as an immediate threat to your ability to live.
  • Second, develop a financial plan. A financial plan can bring a certain amount of clarity to your financial life and investments. A financial plan can also bring context to your investments and instead of a constant worry about whether or not you will be able to meet your goals, you can make more measured and reasoned adjustments to your financial life.
  • Third, review your investment model over time and in light of your plan. While the past is not always certain to repeat, we can look to the past experiences of your investment model to see if it is reasonable in light of your financial planning. We can also see if the past volatility is something you are prepared to experience again. It is possible that based on your financial plan or your emotional tolerances, you are taking on too much volatility and a different model would be better suited for you.
  • Fourth, be flexible and honest with yourself. Many advisors would have you treat your emotions as if they do not exist. We disagree. Our emotions need to be recognized and integrated with our lives. As we recognize that our plans and emotions change over time, we can make adjustments. So, if you found that the last few months were very difficult to bear, or that you were losing sleep over your investments, or you found yourself compulsively looking at the stock news on your smartphone, it would be good to have a discussion with your relationship manager and assess your financial situation and your emotions.

Copyright 2019 REDW Wealth, LLC. All Rights Reserved. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice.