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Strange times, good investing habits

Steve Wendel  |  03 Apr 2020Text size  Decrease  Increase  |  
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These are unusual times. During times of disruption, our minds’ habits can help or hurt us – both in our investing and in our daily lives. Let’s take a look at what habits really are and how you can break free of the negative ones.

Habit: the mental status quo

The term “habit” is used in many ways, but it has a specific and important meaning for researchers Wood, Orbell and Verplanken. They define habits as automatic behaviours, triggered by our environments.

Our minds are constantly looking for ways to automate common tasks – to free up our scarce mental resources to focus on other things. Any action we repeat again and again in a stable context may start being automated, and thereby turn into a habit, according to the European Journal of Social Psychology.

Habits rely on a trigger: something that tells the body to act. The trigger can be a specific situation, such as when you get to your office, you check to see what the stock market is doing. Or it can be a state of mind: When you wait in a line, you take out your phone.

Habits are like little mental programs that run automatically, freeing up our conscious mind to deal with more complex or novel problems. They are, by definition, non-conscious. Once they are automated, we don’t think about them. When we see the trigger, we simply respond.

Investing during strange times

What happens to our habits in times of turmoil?

1) Expect to be tired When our environments change – like when we work from home – our habit triggers are disrupted, too. Previously, we could rely on habits that controlled our eating, our daily schedule, and so on. But for many of us, the coronavirus has taken a chainsaw to our daily lives and our habit triggers; now, our minds need to think through many more decisions. Above and beyond these unsettling times, the lack of our normal habits can make us feel even more unsettled and tire us out mentally. And unsettled and tired are not good states to be in when reviewing our investments.

2) Watch out for bad behaviour You may think some new habits you're already forming are “just for now,". But our habit system is constantly looking for patterns to automate. It’s looking at how we spend our time and how we respond to events, and it’s digging channels in our brains that make those behaviours easier and more likely to reoccur in the future.

That’s great when we’re learning how to navigate having kids at home and how to video-conference effectively. It’s not so great when we’re obsessing over recent events – like the bear market.

What happens if, like us, you’ve started forming bad habits of constantly checking the news and market movements? Researchers have found that the more often people get information about the market, the more that information warps their behaviour. In the current context, this makes them more risk-averse. If you are a long-term investor, watch out for a short-term habit of obsessive market-watching.

3) Turn the change in habits into an opportunity Most of our spending behaviour, for example, is habitual. We generally don’t think about the things we buy regularly. And that can be a problem if we want to put aside more money for the future but find that we’re always short on cash. Our financial habits can defeat our financial goals.

Because those habits are likely disrupted right now, you have an opportunity to revisit what you spend your money on, how much you save, and what you want to accomplish in the long run.

Ironically, it is exactly during the times in which life is most disrupted that we have one of the best opportunities to plan for future normalcy. Researchers Verplanken, Wood and Walker estimate that there is a window of time after periods of major disruption in which our new patterns start to jell.

This is an active area of research, but the estimate is that we’re especially prone to forming new habits within the first 90 days – shorter for often-repeated behaviours, longer for less frequently repeated ones.

We’re in that window now. What do you want your new normal to be? What new routines do you want to adapt in your investing and your spending?

By the way, while this article is focused on financial behaviours like investing, the same applies for other habits in our lives, too. Exercise. Healthy eating. How we spend our time with our families. We’re creating the new normal right now. We’re creating our new habits. Choose wisely.

This article was originally published on www.morningstar.com

is Morningstar’s head of behavioural sciences.

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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