Battling your own brain: The importance of psychology in investing
Is it ever easy to invest money?
Markets are volatile by nature and when we are fed a steady stream of ‘bad’ news – be that Brexit, COVID, political unrest, foreign affairs and so on – it reinforces our belief that ‘maybe now is not the right time’ or ‘I’ll just wait until the time is right’. Sentiments all investors can certainly relate to.
Although it isn’t always easy to invest, we must, in order to defeat the hidden enemy – inflation. Even at 2%, inflation will reduce the spending power of your money by 50% in real terms.
What can we do to make it easier?
Understanding our own psychology and the way our brains work is one way. The parts of the brain that assess risks and threats are known as the Amygdalae – two almond shaped clusters located deep within the brains core.
Each one has a slightly different role and even with the same inputs, wildly different outcomes result. Specifically, our left Amygdala will present a balanced picture whereas the right will see only threats.
It’s a fear conditioning response and helps our bodies prepare for action against whatever threat is posed – spiders, closed spaces, viruses and the like.
In an investment context, this means reports of market success are often portrayed negatively, so even when things are going well, it’s seen as the prelude to a fall. We are drawn to stories with a negative bias and attach more importance to them.
How then can we apply this knowledge to investing in markets?
*Source: Blomberg/7IM
Think long term and look at your portfolio less. Consider quarterly or even yearly updates. Empirical evidence shows that markets are often down around 50% of the time on a daily basis, but over the longer-term deliver returns. Take the MSCI World Equity Index for example. Negative 46% of the time on a daily basis but over a 30-year time, horizon is up over five and a half times.*
Focus on your objectives. If the focus is on achieving your wider objectives, market volatility becomes of less importance.
Reframe the narrative. Or in other words, think about what might happen if you don’t invest – inflation wins every time!
Be more balanced. Review three good news stories or case studies to every negative one.
At Legacy, whilst we don’t claim to be psychologists, we do understand the importance of helping our clients identify clear objectives and establish a plan to achieve these.
Dermot Cleere
Dermot Cleere is a Sr. Financial Advisor at Legacy with extensive experience and expertise in corporate business planning. In particular advising owner managers in relation to business and personal investment, tax planning and wealth management.
“Focus on your objectives. Reframe the narrative. Be more balanced.””
