We are feeling the anxiety effects of not one pandemic but two. First, there is the COVID-19 pandemic, which makes us anxious.
And, second, there is a pandemic of anxiety about the economic consequences of the first.
These two are interrelated, but are not the same phenomenon.
One can feed the other. Business closures, soaring unemployment, and loss of income fuel financial anxiety, which may, in turn, deter people, desperate for work, from taking adequate precautions against the spread of the disease.
The ‘affect heuristic’
Many people seem to assume that the financial anxiety is nothing more than a direct byproduct of the COVID-19 crisis — a perfectly logical reaction to the disease pandemic.
But anxiety is not perfectly logical. Financial anxiety, spreading through panicked reaction to price drops and changing narratives, has a life of its own.
The effects financial anxiety has on the stock market may be mediated by a phenomenon that psychologist Paul Slovic of the University of Oregon and his colleagues call the "affect heuristic". .
Two types of risk
Greed and fear also neatly represent the two sides of investment risk.
Greed represents the willingness to take on more risk.
Likewise, you need to moderate your level of risk to preserve your savings and actually reach your end goal of retiring at all.
Fear represents the willingness to recognize the risks and appropriately manage them.
The Mindfullness
Obviously, we would all prefer to avoid the stress of constantly vacillating between greed and fear, but beyond that, a less emotional decision process clearly makes you a better investor.
Researchers have conducted multiple researches over more than 100 years of data on investment behaviours.
The conclusions are pretty clear - Making decisions driven by greed and fear, or emotions in general, is a poor investment approach.
The obvious advantage of mindfulness is that you avoid the greed and fear trap that imprisons most (perhaps 99%) other investors.
This trap is the source of the Warren Buffet adage that we should, “Be greedy when others are fearful and fearful when others are greedy.”
Investing is Competitive
If you like to think about investing in competitive terms, mindfulness provides us with a readily accessible advantage over the vast majority of our investing competitors.
Better controlling our emotions makes us smarter than other investors, at least in terms of “emotional intelligence”. It allows us to recognize when others are avoiding risks irrationally or taking on risks recklessly.
(Disclaimer : This blog is for information purposes only and not to solicit any business or provide any type of advise)
