Being Human in a Recession!
It is hard being a human! We have powerful brains, but they come pre-programmed with short sighted reward seeking behavior and inability to see clearly across large timeframes. This is why we need psychological preparation and mental frameworks to help us make sense of what is going on and choose the prudent course of action!
I strongly believe that ability to successfully navigate downturns is critical for long term investing. And not just investing, it is actually true about other walks of life where upturns and downturns are an unsurprising reality.
I have five short recommendations that I think can greatly help place things in context and allow one to make decisions that will help you come with flying colors on the other side!
#1 Expand your time horizon
Year to date ~25% decline in S&P 500 (Jun 16, 2022) may look really bad, but when you look at it with a 5 year window, it is up ~50% since Jun 2017! Now it doesn’t look so bad, does it! When you expand your time horizon of analysis, you can place things in their proper context.
#2 Optimize for the quality of your sleep!
Now this may sound like a weird one. What has this got to do with investing. Plenty, actually. The only investing plan that can work for us is the one that we can stick to even in bad times. Research is pretty solid on the fact that people trying to fiddle with their portfolios in falling markets generally do worse than the ones who simply stick to their pre planned investing schedule.
So, don’t check your investment accounts daily and you will be saved from some of the market volatility driven temptations that will do you no good. And you will sleep better! Good sleep is the fountain of all that is good in life! As a general rule, no portfolio that gives you sleepless nights is worth investing into.
(A word of thanks to Matthew Walker whose book “Why we sleep?” really opened my eyes to how important good sleep is for everything in life!)
#3 Know thyself!
When things are good, sometimes there just isn’t that much opportunity for taking a pause and engaging in self reflection. There is something to be said about adversity prompting the inward look teaching us about ourselves. What we do, how we behave, how we engage with others and above all what do we value and why. This self knowledge is extremely valuable and enables us to prioritize the right things cutting down the clutter.
#4 Write and reason!
When contemplating any large action with material impact, I think it helps greatly if we reason through it in writing. One, it clarifies you thoughts in a way thinking alone doesn’t. Two, it records what you did and why, giving you a clear account to refer back to in future. Out minds are great at rationalizing our past actions and shining the torch of hindsight at past. A clear written page is immune to such trickery and reminds you what you were really thinking and feeling at the time.
#5 Lean on family and friends!
When things are not going well, we may feel isolated and cornered. Connecting with close friends and family members is a great antidote to stress and anxiety. Even if you are doing great, it is good to reach out and connect to people to check how they are doing and if they are going through a rough patch. Most valuable thing in our lives are these connections we have with our loved ones and every moment spent nourishing these is time well spent! Reach out to the relatives graduating in the down market and help them prepare and find suitable jobs, organize a family event or trip with common friends. Do a zoom call with an old colleague or college friend. You will remember all this very well in your future, even when you would have forgotten all about this downturn!
Bonus — Inflation Hedge:
I-Bonds (For folks in US) — This is a US Treasury bond offering a neat 9.62% yield right now (Jun 2022) due to high inflation. Each individual can invest a maximum of $10,000 maximum per year (family of 2 adults and 1 child can invest 30,000) and income is exempt from state tax. Thank you Chris Hutchins for bringing this up in your amazing podcast — All the hacks!
