Some thoughts on the recent downturn

Jan 11, 2019 | Dr. Patrick O’Brien DVM, Wealth Advisor at RBC Dominion Securities Inc.


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Why do market down turns cause anxiety? The anxiety we feel and the desire to “do something” is based on our history as a prey species. In this post, I use neuroanatomy and physiology to explain our responses to adverse market conditions.

This current down turn has created the worst December in many years. Many of my clients have not experienced this before and so it is unusually upsetting. I commiserate; I don’t like it either. I’ve given some serious thought as to why it bothers us so much. Two major misconceptions develop as our self-preservation instinct kicks in, shifting our brains from using our thinking cerebral cortex (fore brain in the diagram) to our reptilian reactionary midbrain. The mid brain was designed to keep us safe in the jungles of east Africa by running away from predators rather than trying to calculate probabilities before hoofing it. It was not designed to deal with short term fluctuations in the market place.

Here are two errors in thought associated with midbrain thinking:

A midbrain generated idea is that large Canadian/US blue chips such as the TD bank might actually go bankrupt. This is incorrect; the large companies that hold the country’s culture, infrastructure, and economy together are just as strong as they were in September when markets peaked. In the short term, market prices are just a popularity contest, not a reflection of a company’s value as a going concern.

A midbrain running amuck may also come to believe that this is the new normal and we had better sell now i.e. that corrections/bears are normal and forever. This is wrong, gradually rising markets are normal and downturns are temporary.

Functionally, midbrain thinking assures a deluded investor that selling out at the bottom is a great idea (panic selling). It’s like rubbing an itchy eye - it feels really good (but for only about 3 seconds). Panic selling’s ugly sister tells emotional investors to buy when you feel really good about markets ensuring that you buy at the high. Midbrain thinking also causes undue anxiety.

I’ve attached an article produced by a fund company that I think has some merit, especially the parts about defensive investing and downturn time frames. This downturn is temporary, just like all the ones that have gone on before.

Please contact me as you see fit. I am more than pleased to talk to you.

A guide to market fluctuations

 

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