In my last newsletter I touched on the fact that I am, by nature, an introvert. While reading Susan Cain’s Book, “Quiet,” I discovered that there is a scientific belief that part of what makes a person an introvert versus an extrovert is how easily stimulated one’s amygdala. According to Ms. Cain:
“The amygdala is located deep in the limbic system, an ancient brain network found even in primitive animals like mice and rats. This network – sometimes call the “emotional brain” – underlies many of the basic instincts we share with these animals, such as appetite, sex drive, and fear.
The amygdala serves as the brain’s emotional switchboard, receiving information from the senses and then signaling the rest of the brain and nervous system how to respond. One of its functions is to instantly detect new or threatening things in the environment – from an airborne Frisbee to a hissing serpent – and send rapid-fire signals through the body that trigger the fight-or-flight response. When the Frisbee looks like it’s headed straight for your nose, it’s your amygdala that make sure you run.” (Pages 101-102)
As you can imagine, if one’s amygdala is especially sensitive, then the fear response can be especially sensitive. I can see this in my own life. I am terrified of spiders and there is not enough money in the world that could get me on the Drop Tower at Kings Dominion.
What I am not afraid of, though, is negative and volatile stock markets. When it comes to investing, my neocortex is in control. Again, a description of the neocortex’s function can be found in the book “Quiet:”
“The neocortex, and particularly the frontal cortex in humans, performance an astonishing array of functions, from deciding which brand of toothpaste to buy, to planning a meeting, to pondering the nature of reality. One of these functions is to soothe unwarranted fears.” (Page 118. Emphasis mine)
Although I have been working in the investment industry for over 25 years, I have never seen the deep scars left from fear in investors like I have seen since the Financial Crisis of 2008. Even with stellar returns in the six years since that crisis, the experience has left people with a deep fear and distrust of the stock markets.
It would make sense that the amygdala is driving this reaction. It is a fight or flight response that investors are feeling when they get nervous, especially if they have had a bad experience. When markets go down, they react. The limbic part of their brain screams to “do something”. They may feel this primitive fight or flight emotion and their response could be to pull their money out of the market or to jump ship in some other reactive way.
But if an investor can get themselves to step back and take a broader view of stock market performance, he or she will see that a crisis, for whatever the cause may be, has never been the end of good returns. Taking a look in this way moves the investor from the amygdala part of the brain to the neocortex, allowing them to think in a more methodical way.
Let’s look at the combined world markets from 1970 through 2013:
Although there have been some drops along the way, the graph does not look like the roller coaster ride the markets sometimes feel like in the short term. On a real roller coaster ride, which my amygdala prevents me from riding any of the “big” ones, you start at the bottom, slowly inch your way up, until wham, you feel like you are free-falling, twisting around and you are even sometimes upside down. At the end though, you are back at the bottom where you started. The ride, although extremely stimulating, gets you nowhere.
Despite sometimes feeling like they are free-falling, the markets continue to climb higher over time. They do not start and then stop at the bottom all over again. This is one reason market timing does not work.
As veteran financial journalist and longtime writer on the influential Up and Down Wall Street column in Barron’s Magazine once said:
“Do you know what investing for the long run but listening to the market news every day is like? It’s like a man walking up a big hill with a yo-yo and keeping his eyes fixed on the yo-yo instead of the hill.”1
This is one way that I believe we add value – by helping clients get past the emotions of the moment and helping them stay on track with a philosophy that has been proven time and time again. Set up the correct investment mix – and stick to it.
- Alan Abelson, Story Telling for Financial Advisors (Chicago: Dearborn Financial Publishing, 2000) 213.
