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This is your brain on uncertainty

Sarah Newcomb, Ph.D  |  04 Nov 2020Text size  Decrease  Increase  |  
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I know you want an answer. We all do. It’s been a long slog to get this far in 2020, and to sit in ambiguity even a moment longer feels like an impossible task to many of us. We all want some sort of resolution in this year of unrelenting upheaval and unease, but now is not the time to rush to a conclusion or bet the farm on a particular outcome. It is precisely when emotions are running hot that we need to keep our cool. 

Rushing into action, you fail.
Trying to grasp things, you lose them.
Forcing a project to completion,
you ruin what was almost ripe.

Therefore the Master takes action
by letting things take their course.
He remains as calm at the end
as at the beginning.

—Lao Tzu

Uncertainty is stressful. In fact, humans have been shown to prefer even physical pain to the stress of uncertainty, but we have to be careful right now to avoid making rash investment decisions that we might soon regret. Here, I’ll do my best to give you some healthy food for thought to help you keep your head while others are losing theirs (and possibly blaming it on you).

Doomsday narratives don’t help

Regardless of your political persuasion, you’ve likely been inundated with end-of-the world messaging as of late. It is a common and effective political tactic to claim that “the other guy” represents an existential threat to everything you hold dear. This narrative isn’t new on the campaign trail, but this year it’s coming amid a slew of other threats to life, liberty, and property such as an uncontrolled virus, record-breaking wildfires, typhoons, earthquakes, and hurricanes, massive civil unrest, widespread unemployment, and even murder hornets! In a typical election cycle, the Armageddon trope is less convincing, but this year ... it resonates.

With doomsday headlines everywhere, whichever way the race comes out, roughly half of the voting population will worry that life as they know it is over. I’m personally concerned about this because, though fear is a powerful political motivator, it doesn’t help us manage money well.

Beware of short-term thinking

The real existential threat to your finances is short-term thinking. Decades of research show us that short-term thinking is linked to increased impatience and discounting of future rewards[1], impulsive decisions[2], higher debt[3], lower savings [4], excessive risk-taking [5], and poor health decisions [6].

Fear and uncertainty can make short-term thinkers of the best of us. End-of-the-world narratives and our current state of pandemic confusion only serve to exacerbate the problem. It’s hard to plan for a 20-year time horizon when you can’t see past next week.

To maintain your cool as a long-term investor, you simply must find ways to see past the immediate crises. We can do this by turning our attention away from the uncertainty of things we can’t control and toward things that are certain and things we can control.

Confronting uncertainty with diversification

“I’ve had many worries in my life, most of which never happened.”
—Mark Twain

If the market does have an extreme reaction to the election, you can turn either outcome into an opportunity. In the case of a market crash, you’ll have the chance to buy some great companies when they are at a discount. If there is a large upswing, you can sell some winners that have become overpriced. However, our analysts are doubtful that the market will have an extreme reaction to the election but think it more likely to track the progress of a coronavirus vaccine.

If you are anxious because you are holding a portfolio that is heavily overweighted in one sector or asset class, you may want to ask yourself some questions about how that came to be the case. I’d wager emotion is involved somewhere. What does this overweighting tell you about your true appetite for risk and reward, and how can you use this information to help you make decisions going forward? 

Holding a large percentage of your assets in just a few stocks is an extremely risky business regardless of who sits in the White House. Sitting on too much cash means missed opportunities for growth. If your portfolio is undiversified, you’re at risk for losses, but not because of politics. Consider talking with a financial advisor who can help you create a portfolio that suits both your temperament and your financial goals.

There is always something worth investing in

Regardless of who ultimately occupies the White House in 2021, businesses will still need to adapt to an economy that is undergoing structural changes, a natural resource landscape that is experiencing shifts in weather patterns, and a labour force made up of people who need to stay healthy and who increasingly demand equity and representation for all.

This means that there will continue to be opportunities for innovation in areas like energy production, agriculture, biomedical research and engineering, insurance, property management, and on and on. The opportunities are endless for investors who are thinking about the long term. The specific securities that you choose to buy or sell might change with the election outcome, but your investing principles shouldn’t. Buy value. Sell hype. Learn to recognise both.

Patience is hard work

You’ve likely heard about the famous “marshmallow experiment.” In this study, researchers showed that kids who had the self-control and patience to wait alone in a room with a marshmallow without eating it (not an easy task for a kid!) were the same kids who showed signs of greater success later in life. My favourite detail about this study is that the kids who waited usually had some sort of coping method to help them. They would sing little songs, turn their toes into pianos, and find other ways to distract themselves.

We have more at stake than a marshmallow. In a very real way, some people’s lives and livelihoods are uncertain in this time of ambiguity. However, the skills necessary to wait for a marshmallow are the same skills we need to employ with all our might while we wait for the outcome of this election. That’s the true lesson of the marshmallow experiment—that those who have healthy ways to cope with uncertainty are more likely to have positive long-term outcomes in many areas of their lives. So, let’s learn from those 4-year-olds and get busy with positive actions while we wait for the outcome of this election.

To that end, reading the news and “doomscrolling” right now is like sniffing the marshmallow. It doesn’t help you cope because it increases the pain of waiting in uncertainty. Instead, invest that precious time and energy in something you know will give you a positive return. Be present with your loved ones. Speak kindly to your neighbours. Take your anxiety out for a walk or a run in nature. Sing. Meditate. Dance. Sleep. Do what it takes to stay balanced in your thinking so that you will be mentally ready to take advantage of the coming opportunities when they make themselves clear.

This time of uncertainty and delay will pass. Others will follow. I’ll leave you with another of my favourites from Lao Tzu:

"Do you have the patience to wait until your mud settles, and the water is clear? Can you remain unmoving until the right action arises by itself?"

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Footnotes

[1] Weber, E., Johnson, E., Milch, K., et al. 2007. "Asymmetric Discounting in Intertemporal Choice." Psychological Science, Vol. 18, No. 6, P. 516.

[2] Moreira, D., & Barbosa, F. 2019. "Delay Discounting in Impulsive Behavior." European Psychologist, Vol. 24, No. 4, P. 312.

[3] Ikeda, S., & Kang, M. 2015. "Hyperbolic Discounting, Borrowing Aversion and Debt Holding." The Japanese Economic Review, Vol. 66, No. 4, P. 421.

[4] Xiao, J., & Porto, N. 2019. "Present Bias and Financial Behavior." Financial Planning Review, Vol. 2, No. 2.

[5] Deliema, M., Shadel, D., & Pak, K. 2020. "Profiling Victims of Investment Fraud: Mindsets and Risky Behaviors." Journal of Consumer Research, Vol. 46, No. 5.

[6] Wang, Y., & Sloan, F. 2018. "Present Bias and Health." Journal of Risk and Uncertainty, Vol. 57, No. 2, P. 177

 

is a behavioural economist for Morningstar.

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

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