That, folks, is a human brain and in it resides why most of us struggle with investing. See that red section? That is the amygdala. It works the same for everyone – it is not influenced by a college degree, yoga or IQ. And most importantly, it does not discriminate.
So what does it do? It controls the emotions of freeze, fight or flight. This area of our brain gives us a fantastic biological advantage; it’s kept the human species going and going (e.g., fire hurts, bears will eat you, and steer clear of beehives). You get the point.
However, when it comes to investing…the amygdala is your worst nightmare. Why? Because you can’t just turn it off. The very thing that keeps us alive in the face of danger also triggers when other scary moments arrive at our doorstep. Oh, say…investing…or more so, when investments drop in value.
As soon as the market declines, the amygdala starts to fire up. And we, as humans, all react the same…we run for the exit. Check this out:
This MASSIVE return difference has nothing to do with IQ, street smarts, or SAT scores. The major difference can be attributed to fear, which is why the average investor has underperformed by 7.4%* over the last 30 years!
So what can you do about it?
When it comes to investing, you need to hire a professional to stand between you and your retirement account – a voice of reason, a champion in the darkest of times and an advocate that will unemotionally keep you on track. We stand ready and waiting to help so you can keep your amygdala focused on other things.
*Based on Dalbar’s Quantitative Analysis of Investor Behavior study.
Published on May 16, 2016