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Investor Behavioral Psychology

Mark Henke, JD, CFP®

Director of Financial Education

Last Updated
August 10, 2020
Person at library

The Importance of Overcoming Negativity

This article is about investor behavioral psychology. Before we get started, I’d like to take a moment to break this down.

Investor – I’m not talking only about the Warren Buffets of the world. Anyone with an IRA or 401(k) qualifies as an investor under this (or any) definition.

Behavioral – I recently adopted a rescue puppy fostered by a colleague (against the clear direction of my spouse… admittedly, not the smartest move), and we were quickly forced to hire a dog trainer. It didn’t take long for me to realize that a professional dog trainer is really a professional adult trainer. His time was spent on my behavior, which I admit needed some improvement. (I passed with a C grade.) What I learned from this experience is that behavioral tendencies can be difficult to change, but it helps to gain perspective from an outside source (the person trainer in this case). It’s not until you recognize a behavior that you can work to modify it.

Psychology – Long ago, I needed additional credit hours to graduate college, and I asked the basketball players what courses they were taking in an effort to procure an easy A. Their answer led me to psychology. I passed the course, but I don’t remember much except that, evidently, women mature sooner than men, and some women are ambivalent about some matters, concepts I had not pondered. That said, I’ve learned from professional experience that psychology plays an important role in investing.

I love audio books because I can listen while I’m on the move. A great book on Audible is The Power of Bad: How the Negativity Effect Rules Us and How We Can Rule It by John Tierney and Roy F. Baumeister. Here’s a key point from the book: A negative stimulus has four times more impact on us than a positive stimulus. Four times! (I just saved you eight hours and nine minutes of listening time!)

That simple statistic can explain a lot about a person’s thinking, emotional reactions and general behavior. Every future event should be viewed with an awareness that negativity impacts our thinking much more than positivity.

This holds true in many areas of our lives, including investing. Losing money feels intensely awful, while earning money is somewhat expected. Somehow, the feelings of negativity are more real than the joy of positivity. Once you understand this, you will be more prepared to deal with volatile markets. If you can take a deep breath and remind yourself that your emotional reaction to a negative market is what’s driving your behavioral response, you can remove emotion from the equation and take a more reasonable approach.

The “power of bad” impacts, not just our emotional response to investing, but nearly every aspect of our lives. The exaggerated influence of negativity can impact how we relate to our spouses, children, clients and colleagues. It can upset our investment plans and household budgets. For example, a single bad incident with a neighbor can cause us to consider moving.

Given that in today’s world, all news seems to be bad news, we must be intentional in finding the good in every situation. Each of us has the power to overcome negativity, in investing as in life.

At Creative Planning, we work with clients to build diversified portfolios to weather volatile market conditions. Our teams understand the importance of providing investment returns during positive markets while protecting the downside during negative market conditions. Your portfolio is personalized based on your specific situation, objectives, challenges and risk tolerance. If you would like help building a portfolio to navigate challenging markets, or if you have any other financial questions, please contact us.

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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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