Emotions & The Bear Market

As it turns out, the stock market doesn’t always go up.

At this point, there’s no use in shouting from the rooftops “Hey everyone, guess what, we’re in a BEAR market!”?

We know.

Although the 2020 “recession” was certainly a scare, it felt over almost as quickly as it started. Economists call it a V shaped recovery.

A sharp drop, yes, but the bottom set in fast. Before most could even react, the S&P 500 was already rocketing past pre-pandemic levels and onto higher highs.?

For many of us, on the other side of the longest recorded bull market in modern times, this is the first significant “kick in the teeth.” It is for anyone who started their investing journey within the past 13 years.

All of a sudden, the gurus, course sellers, stock pickers - they’ve all gone silent. Even the “buy the dippers” are gone. The eternal pessimist, “told you so” investors are coming out of the woodworks, braggadociously beating people over the head with their doomsday predictions “no ever listens to.”

But most of us are feeling - feeling confused, betrayed, maybe stupid, and certainly anxious about how to move forward.?

This image paints the picture.

At Daizy, we’re tech people, but we’re also people people.

We recognize that no matter how slick our UI or how insightful our data, none of it cures how you feel, and how those feelings are driving decisions that shape your financial future.

We also know that telling you to turn a blind eye to your losses, continue to dollar cost average, and swallow your feelings just doesn’t cut it.

So today, let’s not even talk about money, strategy, or the most logical path forward. Let’s take even one more step back.?

Instead of reacting to what’s happening in the economy, let’s take a second to learn how we can more effectively respond to our emotions.

According to Michael Levine from Psychology Today, “...emotions drive 80 percent of the choices Americans make, while practicality and objectivity only represent about 20 percent of decision-making.”

So, given this, how can we better understand our own decision-making, and navigate our emotions in this tumultuous time?

Awareness

Building awareness is the first step. Svetlana Whitener, a Forbes Council member, asserts that we act on feelings based on a root emotion. She details a five-step process using Paul Ekman’s Emotion Wheel, to build awareness of the emotions beneath your decisions:

1. Name what you are deciding. You don’t need the Emotion Wheel for this, but you do need to consider exactly what the problem is and the ramifications of your proposed solution.
2. Recognize and name all feelings you are experiencing in connection with the decision. These feelings will no doubt appear somewhere on the outer circle of the Emotion Wheel.
3. Bring your feelings inward through the middle circle to identify its root cause (an emotion).
4. Process that emotion, not one of its symptoms (a feeling).
5. Be aware of whether you want to make a decision from this specific emotion or if you want to adjust the course.

This process might sound robotic, but it adds structure to an otherwise abstract, unconscious motion. With practice, we can recognize how significantly our emotions affect our decisions and then adjust them as needed.?

Time

After building awareness, if you realize that you are about to make an emotionally biased decision, the simplest strategy to help yourself is to buy yourself some time.?

Initial emotional reactions don’t last long, and we are biologically designed to return to a baseline emotional state after a few minutes or hours.

Dr. Brad Klontz, a financial psychologist at Creighton University, says, “The goal is to put some time between your impulse to act and your behavior…If you can put some time in between those two things, you are more likely to calm down your emotional brain, engage your rational brain and make a good decision.”

The logic part of our brain acts five times slower than our emotional and primal brain centers, so allowing time to pass is a biologically and psychologically proven way to insulate yourself from rash and poor decisions.

Reappraisal

Finally, the scientists from the previously linked Emotions and Decision Making study give one more method that they claim is the most effective: Reappraisal.

“Reframing the meaning of stimuli that led to an emotional response, i.e., reappraisal, has consistently emerged as a superior strategy for dissipating the emotional response.”

As investors, reappraisal is especially useful in a bear market. Using reappraisal we can remind ourselves that losses are normal and that downturns are opportunities to learn more and become better investors.?

Reappraisal is about zooming out, considering different perspectives, and then choosing one that minimizes your own negative emotional response.?

It’s essential to know that the goal is not to suppress emotion, but instead to evaluate which emotions should factor into your decision-making and to consider which emotions will contribute to a healthy decision.

Final Thoughts

Everyone’s financial situation is different, and there is no foolproof answer to “what should I do during a bear market?”.?

But the truth is, too often we ignore our own humanity and psychology when trying to make financial decisions. This leads to suppression, ignorance, and poor habits in the long term.?

So, before you make drastic financial changes in reaction to a changing economic environment, take a second to check in with yourself, and use these tools to evaluate your mental state.?

Here’s to a healthier financial future - be well and take care.

Daizy.