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We live in spooky and chaotic times—the financial markets are sometimes spooky too. How you process these shocks largely determines your financial future.
Best-selling author Morgan Housel recently outlined The “Shock Cycle” for big events:
- Assume bad news is permanent
- Ignore bad news
- Deny bad news
- Panic at bad news
- Accept bad news
- Ignore good news
- Deny good news
- Accept good news
- Assume good news is permanent
The “Shock Cycle” is helpful in determining how you use information to make decisions. Can you identify where you are in this Cycle?
HOW DO YOU REACT TO SHOCKS?
Data scientists estimate about 74 GB of information crosses your path every day. That’s equivalent to watching 16 movies! Since it’s impossible to process all this information, your brain seeks shortcuts.
One of the most common shortcuts is to look for strong opinions – you want certainty in place of uncertainty. It’s superficially comforting to desire certainty and safety in times of uncertainty; the problem is certainly doesn’t exist in the real world. Wall Street is full of talking heads all too willing to opine on geopolitical events and everything else. For the most part, these opinions aren’t relevant to your particular situation and therefore are nothing but noise.
It’s important to remember that cheap emotional appeals from media pundits can’t replace logic. Your financial timeline is the next couple of decades or more, not the next 24 hours.
The world around you can change quickly. Nassim Taleb says, “History doesn’t crawl, it leaps.”
You may want everything to stand still and be less spooky, but that’s not how the world works.
Wars, terror attacks, and natural disasters can shock the world. However, these events usually aren’t major long-lasting factors within the financial markets. These events and the human toll they extract are horrific, but they don’t dramatically change the long-term trajectory of the markets.
You may feel scared or fearful because of these events, but the stock market has proven to be incredibly resilient in recovering from short-term shocks.
WHY THE STOCK MARKET IS THE ANTIDOTE
Over time the stock market neutralizes the impact of external and internal shocks. Inflation is an instant example of an internal shock that’s a very real factor today. It’s important to remember that the primary reason for investing in the stock market in the first place is to offset inflation – to sustain your lifestyle. In this way, the stock market is a kind of financial chemotherapy destroying the cancer of inflation.
Spooky times can be fertile ground for financial mistakes – mistakes wreak havoc on your financial life. Armed with a long-term perspective you can prevent costly mistakes. If instead, you substitute a short-term outlook, expensive mistakes can overwhelm you.
You can’t make spooky events stop, but you can direct your energy toward staying focused on your specific set of financial circumstances. Surprises happen all the time – how you react matters. Start there.