Why do so many people get “stuck” when trying to invest? And how can we get unstuck?
Everyone is different, but a common thing I see in investing is that when people are anxious, they often “freeze”.
They stop taking action and then get stuck. In my financial coaching I help those people get unstuck.
This may seem strange for all you investing ninjas out there, but many people find making investment decisions overwhelming. Why? As usual, evolutionary psychology offers us some interesting answers and potential cures.
As Joe Navarro explains in What Every Body is Saying, one of the ways the human brain has achieved our survival as a species is by regulating our behaviour when faced with danger. Because we are genetically pretty much identical to our hunter gatherer ancestors, this applies equally to a prehistoric man facing a Stone Age beast or a modern soldier in a combat zone.
We are part of nature. Over the millenia, humans have retained the useful life saving reactions of our animal heritage. We’ve heard of the “fight or flight” response but that phrase is incomplete. In reality, animals (including humans) react to perceived danger in the following order:
As early hunter gatherers crossed the African savannah they were faced with many predators that could outrun and overpower them. Early man could not outrun a tiger nor beat it in a fist fight. Running attracts attention and fights are dangerous. If the reaction really were just fight or flight, we’d be bruised and exhausted much of the time. The best way to avoid a tiger is not to fight it or run from it, it’s to ensure it never sees you.
Movement attracts attention. So the best initial response when you hear a rustle in the leaves is to freeze. The eye is drawn to movement so freezing can make you invisible to predators. Many animals not only freeze their motion when confronted by a threat, but some even play dead which is the ultimate freeze reaction. And, as this video shows, it works.
Note the asymmetric payoffs to a freeze response. If the leaves rustle and there is no tiger (its just the wind) you’ve lost nothing by freezing. But when there actually was a tiger, if you moved you were more likely to get removed from the gene pool. So there are good evolutionary reasons why we err on the side of caution and feel more fear than is warranted by reality.
The freeze response has been passed from reptile to mammal to modern humans and remains part of our hard wiring. For example, if you look at people in a tense situation (e.g. a job interview) they will often seem immobile or stiff at the start. Anxiety manifests as a lack of movement.
As the interview progresses and the job applicant relaxes, you will see them move (for example their hands) more fluidly. Body language is important for congruent communication so its worth knowing this stuff for when you next have a salary negotiation with your boss.
Whilst the freeze response was useful in our evolutionary environment, it can be unhelpful in the modern world. Remember the phrase “rabbit in the headlights”?. It would be easy for the rabbit to avoid the oncoming car if it hopped to the side of the road. Here, freezing may result in a sub-optimal outcome for the rabbit.
Anxiety is our mind’s way of motivating us to problem solve. The problem comes when anxiety tips over into fear. Fear is paralysing and can stop you from doing the right thing. Like a golfer who has lost their confidence, this is where your inner feelings and beliefs (your Inner Game) can mess up what you do in the real world (your Outer Game).
This begs the question of why people often feel fear around financial decisions. We don’t really care about zeros on a computer screen or banknotes which are just pieces of paper. Money worries are worries about survival, resources, offspring and status, the things that mattered to our ancestors and that still matter to us today.
We feel the fear of loss of 20% of our equity portfolio, the same way that a caveman would have feared the loss of 20% of his food supply. The human race has spent most of the last 100,000 years with its nose pressed up against the limits of our food supply. A 20% increase in food supply for a caveman would be nice but a 20% loss of food supply might easily kill them. This explains loss aversion and is why our fear of loss feels real, deep and primal.
Most people put finance and evolution / nature in 2 completely different mental buckets and never think about the linkages between them. But if you can accept the logic of this, then some answers become clearer.
To ensure a solid base for decision making you first need to be in the right mental and emotional state. So start by ensuring you have met the basic biological needs at the base of Maslow’s pyramid. You need to be eating well, getting plenty of exercise and sleep and have screened out all anxiety triggers (the news and most of the stuff on TV).
Once you have a solid base, you can start to use your logical brain (rather than the chimp brain). Logic tells us that investing in equities is the easiest way to build wealth over the long term.
We can then get started. One way to do this is innoculation. Think of a vaccine – a small, weakened dose of the virus allows your body to get used to dealing with it. So expose yourself to a small dose of the trigger of the fear. For example, if you are scared of buying, you can break the logjam by buying a single share in a Vanguard ETF to get used to the feel of the process. This can be with a practice account at first then with real money later.
One way of side-stepping the complexity of choosing an index or region is just buy a global tracker from Vanguard such as VWRL or VHYL. This gets you into the habit of making decisions, taking action and breaking the logjam.
If your response to this is:
Yeah…but how do I know which is the best one?
The answer is:
You can’t know for sure…and that’s fine!
No one knows which fund will go up most over the next 10 years. Sure, I’ve got an opinion on which look good value but I don’t know for sure and nor does anyone else. When it comes to market forecasters, there are 2 types; 1) those that don’t know and 2) those that don’t know that they don’t know.
We all want to know the future so a huge demand for financial forecasting exists. If people demand a product, then the market economy will supply it…even if it’s useless. Reading economist’s forecasts or fund manager’s economic commentary is a waste of time because everyone reads that shit and it has already been reflected in share prices.
Even worse are those websites predicting economic collapse, hyperinflation and the coming Zombie Apocalypse. I’d like to say those websites are harmless fun but when they stop people from investing, they are not harmless and they’re no fun.
Reading financial news / forecasts etc takes time and most people don’t have infinite time. Reading this stuff is a form of displacement activity, a substitute for doing something useful. Excess information has become a huge part of the problem. We all have limited processing capacity and more information beyond that point just frazzles us. So turn off the screen and remove the noise from your life.
Excessive planning is just another trap. It’s important to let go of the notion of perfection in investing. All we need to do is get the basics right (e.g. investing in equities via Vanguard’s low cost trackers). There is no need to pick the “perfect” ETF or fund or share. There is no perfection in investing.
We need to get into the habit of taking decisions even when the future is uncertain and we are not sure which fund or share is “best”. If you never get into the habit of investing, then the differences between funds / ETFs / shares etc are completely academic.
As you learn more, you may choose to add further funds and “tilt” your portfolio towards asset classes that have historically generated higher returns. You can see an example of tilting towards value in The Simplicity Portfolio.
But we have to learn to walk before we can run. We are all habit machines and so its really important to get out of the habit of being stuck. Over time, the rut will only get deeper unless you take action to break out.
Often the best advice on “investing” is not really about investing, it’s about dealing with our emotions. As David Schwartz puts it in The Magic of Thinking Big:
Action cures fear. Action feeds and strengthens confidence; inaction in all forms feeds fear. So to fight fear, act. To increase fear – wait, put off, postpone.