Market Turmoil Pits Instinct Vs. Logic

Market Turmoil Pits Instinct Vs. Logic

A lightly moderated debate on bailing on or buying more stocks now.

Reviewed by: Allan Roth
Edited by: Allan Roth

Market headlines have been brutal lately, with stories like “Markets Plunge Again Amid Coronavirus Fears” making the rounds, stoking fear among investors.

This had me thinking, debating my own conflicting points of view, much like Nobel Laureate Daniel Kahneman’s two systems of thinking, detailed in his book, Thinking Fast and Slow. System one, the fast fight-or-flight part of the brain, is what I’ll call the “Instinctual” brain. System two, the slower, more logical part of the brain, I’ll call the “Logical” brain.

In the face of all the market turmoil of late, here’s how this internal debate with myself went—a debate I’m sure many investors can sympathize with:  

Moderator: Are we heading into a bear market? Will it be as bad as the financial and real estate bubbles? What should we do now?

Instinct: We absolutely are! Wake up and smell the coffee, Logic. Haven’t you seen that the Dow Jones Industrial Average (DJIA) has fallen by nearly 4,000 points in only seven trading days? The coronavirus is sure to cause a bear market that will make the dot-com and financial bubbles look like a walk in the park. What should we do? Sell all equity ETFs now, of course! Every minute we spend thinking about it means we’re that much closer to losing everything we’ve worked so hard for. In times of crisis, the only safe harbor is to be heavy in the SPDR Gold Trust (GLD) or even in cryptocurrencies like bitcoin.

Logic: Take a deep breath, Instinct. You’re going to hyperventilate! You know the DJIA is a lousy measure of U.S. stocks. Let’s put things in perspective. In the last seven trading days of February, the market lost 12.6% as measured by the Vanguard Total Stock Market Index ETF (VTI). International stocks fared a bit better, with the Vanguard Total International Stock ETF (VXUS) losing 9.1%. That’s from an all-time high, and we’re flat over the past six months. Surely you aren’t expecting another 11 years of a bull market. Nobody can say with any certainty that this is the beginning of the bear market, but I hope it is.

Instinct: You don’t have a clue, Logic. The time to get out of the market is before the inevitable plunge. Just look at this interview showing coronavirus could be worse than the Spanish flu, where millions of people died. We’re going to lose everything!

Logic: Though anything could happen, of course, I’m not even convinced the recent market blip was entirely caused by the coronavirus. Even if it was, do you know anything the market doesn’t already know? Haven’t you learned anything from past mistakes? Don’t you remember how loudly you were arguing to get out of the market in Q4 2008? And you were almost unbearable on March 9, 2009, when the market bottomed.

Instinct: Of course it’s the coronavirus that caused the market plunge. What else could it be? I have no recollection of making mistakes. Wait; did I hear you say you actually hope this is the beginning of a bear market?

Logic: Yes, you heard correctly. Bear markets are part of investing, and there’s extensive data demonstrating that individuals and advisors buy high and sell low and repeat the greed-fear cycle of the behavior gap. Perhaps they’re thinking with your part of the brain. Didn’t that rebalancing I did back in 2008 and 2009 work out well? Investors are predictably irrational.

Instinct: You got lucky, Logic, and know better than to use past performance. Bet you could’ve done a lot better had you exited the market on Oct. 9, 2007, and reentered on March 9, 2009. You’ve been rebalancing by reducing stock funds for nearly 11 years, when it was so obvious we were in for the longest bull market in history.

Logic: You’re using what’s called “hindsight bias” to perceive events that’ve already occurred as having been more predictable than they actually were before the events took place. No one had a working crystal ball, and research reveals that trying to time the market doesn’t work.

Moderator: So, what are investors to do right now?  

Instinct: It’s my part of the brain that led us to survive as a species by knowing when to fight or flight.  We humans wouldn’t even be around if it weren’t for instinct. Now is the time for flight. Sell, sell, sell this minute!

Logic: What led us to survive as a species fails us in investing. Investing is simply “minimizing expenses and emotions; maximizing diversification and discipline.” We agreed on a moderate portfolio as a compromise, and I’ll not only hold my stock funds, I’ll also buy more to rebalance if this does turn into a bear market. In fact, I just bought more passive equity funds while you weren’t looking!

Moderator: There you have it—two opposite viewpoints.

The lesson here is that ultimately an investor must build a portfolio that both instinct and logic can live with. Markets don’t move in predictable, linear patterns, so finding an asset allocation compromise that allows you to sleep well at night in the face of turmoil, while staying the course in line with your long-term goals, is the only way to digest the alarming headlines and not take event-driven action.


Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine. You can reach him at [email protected], or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.

Allan Roth is founder of Wealth Logic, an hourly based financial planning and investment advisory firm. He also benchmarks portfolio performance for foundations and other business concerns. Roth's website is You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter