Fear sells, but excitement buys
We're constantly telling clients to remain calm during sell-offs. It's just not possible
Have you ever tried to stay calm on a roller coaster? Your heart rate isn’t going to slow down while you’re hurtling along the track, upside down, 100 feet above the ground.
It’s just not possible.
The same is true when you’re watching your life’s savings evaporate while seemingly rational people talk about chaos, panic and plague. It’s normal to feel anxiety.
As investors, we’re constantly told to remain calm during market turbulence. Anxiety lowers cognitive abilities, risk tolerance and confidence, so it’s not the ideal emotional state for an investor.
But trying to calm down when the markets are crazy might be ineffective advice. Here’s why.
‘Keep calm’ is bad advice
According to Harvard researcher A. W. Brooks, the impulse to try to calm ourselves when we are anxious doesn’t help us perform better in the situation. Ms. Brooks studied the effect of coping strategies on performance in high-anxiety tasks like singing performances, math exams and public speaking. In her experiments, she found evidence that people might have more success by “reappraising anxiety” instead of trying to calm down.
Can fear be fun?
Anxiety raises your heart rate and creates a restlessness in the body. Excitement also raises your heart rate and creates a restlessness in the body. The two emotions feel strikingly similar, except that anxiety is felt as negative and can lead to negative outcomes, while excitement is felt as positive and can improve outcomes (at least on tests and karaoke challenges).
The idea here is that if we can tell ourselves that we feel excited rather than anxious, we will be better equipped to ride out the stomach-lurching drops in the market.
Whether it’s a pandemic, political shift, technological breakthrough or something else, we will see black days — or weeks or months — in the market. As an investor, it’s normal to get scared. That’s OK. Instead of staying calm, treat it like a roller coaster, and turn the fear into fun.
How to do it
I used to hate roller coasters. The few times I was roped into riding one, I would close my eyes, grit my teeth and just count down the seconds until it was over. To me, the experience was complete torture with absolutely no benefits. Why would a person put themselves, willingly, into such a situation? I didn’t get it.
My daughter, it turns out, is a thrill-seeker. So when we went to a theme park together, I was faced with a choice: Disappoint my daughter, or get on the most extreme ride of my life. Standing on line, I observed that the climb upward was completely vertical. The twists and turns went upside down. I knew that if I was going to ride this ride, I needed to change how I felt about it — pronto.
I decided to treat it as a test of courage. I would put myself in a situation that was guaranteed to be both frightening and out of my control, and I would not let the fear take over me. I made a decision to stay present, grab the adrenaline at its source and channel it into excitement. With my eyes open and mind in the moment, I was going to let thrill flow through me instead of fear. Rather than block the experience out, I would soak it in and find the fun. Steeped as I was in this excited mindset, I was not fazed at all to be ushered straight up to the front two seats.
I strapped myself in and chose a song to play in my head, to focus my emotions. As we began the slow crawl to the first peak, I kept my eyes open, and told myself, “I’m excited.” When we crested the summit, and I faced the near-vertical drop, I thought, “Bring it on!”
I screamed, I laughed, I screamed some more. I felt the intensity of emotion fill my senses and then some. By the time the ride was over, I was truly enjoying myself, and I felt braver than ever before.
Surprisingly, when it was over, I was ready to go again.
The technique I used was simply to tell myself I was feeling excited while I was feeling scared. This is one of the same techniques that Ms. Brooks had her study participants use, and it’s easier than you think. Because your body is already agitated, your brain will believe you. This has worked for me in situations as disparate as public speaking, exams, business pitches and, yes, investing my own money.
Excitement sees opportunity
The difference between fear and excitement is significant. Fear looks for threats, and excitement looks for opportunities. Fear is a very powerful storyteller. When you are fearful, drops in the market trigger anxiety and what-if scenarios that would frighten the calmest among us.
On the flip side, when you are excited, your brain looks for opportunities and believes in optimistic outcomes. If you are excited about the market dropping, you’ll search for great discounts on companies and funds that you may have previously wanted to buy, but were overpriced, or simply out of your price range.
When the COVID-19 outbreak became a market scare, I had to fend off the urge to lower my portfolio risk exposure. I know better, but fear is a natural response to threat. So, I thought about the roller coaster. My inner monologue said, “Here we go, bring it on!”
And then an amazing thing happened: I started to feel calm. I literally felt amused by the five-figure drop in my balance that happened in one day, and I said to myself, “This is the ride. Scream if you have to, but you chose to be here. You’re going to feel like such a rock star when it’s over.”
Over breakfast, I told my teenage daughter, who is trying to decide how to invest a small inheritance, “Listen, you need to pick some companies because I don’t know when we’re going to have a better opportunity to buy at great prices than right now.”
Fear sells. Excitement buys. That’s the power of anxiety reappraisal. Use it.
Sarah Newcomb is a behavioral economist at Morningstar
This article was first published at Morningstar.com.
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