Last night I was reading a terrific book by a fellow named Paul Tough titled How Children Succeed in which there are several passages where he talks about how children experience and perform under stress, both at home and in a school setting, and it’s inspired me to make some observations relevant to our profession.
The human body’s physiological response to stress can be described as, in Mr. Tough’s words, the “hypothalamic-pituitary-adrenal axis,” or the HPA response, the body’s bio-chemical emergency preparedness system. The HPA evolved over tens of thousands of years during our early history to put the human body on battle stations in the face of acute physical danger. Lions, tigers, bears … other humans, perhaps other species which were nearly human. You get the idea. The problem, however, is that over the last several hundred years, this emergency response system is often no longer properly equipped to help us with our typical current “threats.” The dangers that confront most of us now have more to do with relative abstractions instead of furry beasts. We contend with money instead of the mastodon.
So in the modern age, we are equipped with a physiological emergency response system which evolved to help us survive in the face of danger. However the HPA cannot distinguish between mortal danger and modern non-mortal fears. When one feels fear, stress, senses danger of any kind, be it physical or psychological, social or financial, the body responds in the same, blunt manner. This is why, during stressful or intimidating conversation, the body floods with adrenaline, and why the stomach feels empty (the blood has moved from the abdomen to appendages in anticipation of action). Why, when speaking in front of an audience, your mouth goes dry, and voice goes shaky. Why when we read a difficult note or interpret an important mathematical number (like a dollar amount or test score), our body tension increases. Hence the problem: while physical threats are relatively few and far between for most of us, especially in our professional lives, our body’s natural response is still activated in the face of modern “dangers.” Unfortunately, this can cloud thinking and frustrate proper action when clear thinking is exactly what is needed.
Our assets, our investments, represent a good deal to us. They represent not only hard work, our discipline, our past and ongoing sacrifices; they also represent many of our hopes. Our hope that we will be able to retire and enjoy the post-work time of our lives. Our hope that we will be able to take care of our loved ones. Our hope that we will be able to pay for our children’s education. Our hope that we will be able to transfer some measure of wealth to our beneficiaries. Whether our money is held in a bank account, within a professionally managed investment portfolio, or in a jar buried under the porch, the movements of the capital markets and larger economic developments are directly relevant to the usefulness of the money that we have set aside and the hopes which we have assigned to it. When the stock market experiences a correction, or when the value of bonds fall in an increasing interest rate environment, or some apparently deleterious macroeconomic trend begins, it can be tempting to succumb to your body’s emergency response system and react impulsively … and portfolio-wise, that almost never produces a good outcome over the long term.
Taking it one step further, this may well be why we, as a species, developed philosophy, politics, and economics. These higher brain constructions help us, through understanding and reason, to put our daily concerns into their proper, solution-driven perspective. When interest rates rise, the rational thing to do is not to panic and go out and buy every bottle of water you can find, but rather to thoughtfully consider prudent ways to make your assets more productive. When the capital markets fall, the rational response is perhaps not to incautiously sell off all your stock, go to cash, and take up doomsday prepping. Rather, a better approach is to stay the reasoned course which you set for yourself, reconfirm the appropriateness of your general investment objective and portfolio allocation, and, if you have adequate discretionary reserves, perhaps look for some good value securities to buy that everyone else, in a panic, is selling.
Perhaps the oversimplified conclusion here is just to keep your head, especially when the headlines are either ebullient or scary, and recognize that investments are not actually bears or bulls. Rather, they are opportunities (and perhaps moral responsibilities) to fulfill your goals and potential. And the beautiful thing is that money’s mere existence, and the elaborate economy behind it, is itself a fulfillment of a previous generation’s hope.