Swedroe: Avoid Investment Depression

December 31, 2015

As the holidays conclude and the calendar turns into a new year, depression can become an all-too-real possibility. After all, the daylight hours are shorter, and what seems like the longest and coldest (at least in some places) stretch of winter is still ahead.

It’s a common time of year for depression, which is frequently described as feeling unhappy, miserable or down in the dumps. Many people have felt this way at one time or another for brief periods. It’s normal.

Most of us, however, are able to prevent a snowballing effect, and we can avoid sinking into clinical depression. Clinical depression is a mood disorder in which feelings of sadness, loss, anger or frustration interfere with everyday living for weeks or more. It is caused by a downward spiral into worry and anxiety, rendering our brains unable to right themselves.

Fortunately, there have been major advances in neuroscience (the study of how the circuits in our brains work). These many advances have helped us understand how to address this problem, not only through medical treatments (such as pharmaceuticals) but through behavioral changes that alter the way our minds work.

We’ve learned that altering behaviors can help avoid a downward spiral and create an upward one. That’s what a wonderful new book, “The Upward Spiral” by Alex Korb, is all about.

Fighting The Negative

As Korb described what happens to those who get sucked into a downward spiral, I was continually reminded about the conversations I’ve had with investors during bear markets. I found that, quite often, the only light at the end of the tunnel many investors could see was the proverbial headlights coming right at them.

Their tendency was to focus only on the negative news. They would anticipate everything that could go wrong, and end up in a loop of worry and anxiety that would lead at best to indecisiveness, and at worst to panicked selling.

Bear markets will cause almost all of us to worry to some degree or another. One reason is that—no matter who we are—our brains are programmed to react more strongly to bad news than to good news.

We feel the pain of a loss much more strongly than we feel the joy of an equal sized gain. Negative emotions dominate positive ones. The difference between people who suffer temporary “investment depression” and those who suffer “clinical investment depression” is that the first group doesn’t get stuck in a feedback loop of worry.

In his book, Korb provides some simple actions we all can take to avoid sinking into a loop of worry. Based on my experience, they can not only help you deal with the problems that life throws your way, but they can help you become a better investor as well. Given that about the only certainty in investing is that there will be more bear markets, the following tips can prove helpful in avoiding panicked selling (one of the keys to Warren Buffett’s success).

Korb explains: “When your mood gets worse, so does your brain’s negative bias. Feeling down means you’re more likely to notice negative things about the world.” Remember that battles are won in the planning stages, not on the field itself.

 

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