Maybe this has happened to you . . . You settle into your chair and take a sip of coffee. You turn your television on to a financial network, or you start perusing a financial newspaper or website.
Then the battle of your brain(s) begins.
You think . . . I’m glad I’m invested in the market right now. It’s near all-time highs. And if earnings season pushes it even higher, a sweet summer rally might make me even more money. You take another sip of coffee.
Abruptly, your thoughts turn dark. But what if these highs in the market don’t hold through July? Valuations are high . . . most analysts say so . . . and lately some of the prices on my positions have gone parabolic. That’s good, but things that go straight up usually end up falling straight down. I could lose all of my profits—and fast.
The muscles in your forehead tighten. Should I take my profits now? And what about my losing positions? If the markets fall, will they fall even harder? Your stomach clenches and your neck feels stiff.
You turn to your computer screen and log into your account. A glance at the numbers confirms you’ve got decent profits in many of your positions.
Heck, the market has an upside bias . . . everyone says so. What if I get out and then it rips higher? I’ll miss all that upside. And I’ll miss the chance for my losers to come back. Besides, I’m in this for the long term, right? Right. You exhale and feel your shoulders loosening.
Just then, a television talking head with a dour look on his face blurts out, “Global growth is slowing and European banks are in trouble. Retail sales are decelerating. It will be very difficult earnings can grow in this environment.”
Once again, you sink down in your chair. Fear of lost profits creeps back into your mind. How do I win at this game and retain my sanity?
What you are experiencing is a form of “cognitive dissonance.” When your belief systems, attitudes, or behaviors don’t harmonize with each other, it creates what I call “brain backlash.” You can suffer anxiety, stress and even physical discomfort.
Before we dive further into this topic, let’s look at a diagram of our brain(s), where all of this takes place. In the graphic below, you can see how the neocortex brain sits atop the limbic brain. (Tucked below the limbic brain is the reptilian cortex; we’ll talk about it at a later date.)
The neocortex represents the “thinking” brain. This is where our higher intelligence lives. When we’re involved in the financial markets, the neocortex initiates our analysis, researches company fundamentals, and analyzes price charts.
Big-picture thinking, forward thinking (what are this company’s prospects for growth in the future?) and strategic planning also originate in the neocortex. As long as we can keep our thoughts flowing in this brain, we make the smartest decisions.
Beneath the neocortex is the limbic brain, or the “emotional” brain. Our emotions act as a filter to our thoughts. Again, when our emotions (I could lose all of my profits—and fast) disagree with our thoughts (I’m glad I’m invested in the market right now), the result is cognitive dissonance and the accompanying anxiety.
So, how do you avoid cognitive dissonance—and the actions it can result in–when you’re involved in the stock market? You have to get your thoughts and your actions to agree. Most importantly, you want to thinking and act in harmonious ways that lead to your highest success in the market!
Try these three steps to avoid getting mired in “brain battles,” and making costly mistakes:
- Whenever you feel yourself becoming mired in opposing thoughts/emotions/actions, leave your desk (or wherever you are) and ideally, go outside. Find a quiet place. Turn off any devices you have with you. Get still and take ten deep breaths. Inhale for the count of three and exhale for the count of five.
This is a simple yet scientific way to calm your mind. Then continue to sit quietly or take a walk. Within a few minutes, you should feel more calm, more confident and able to make wise decisions.
- One of the best tactics to earn the highest profits and enjoy a stress-free market journey is to have a plan in place. That could include 1) a well-thought-out overall blueprint of your financial goals, 2) a standard entry strategy for each new position, and 3) a standard risk-management and profit-taking strategy that you stick to no matter what the market does.
- Finally, make it a habit to constantly keep your thoughts, feelings and actions aligned with your financial objectives. If you strive to keep an unwavering eye on your goals, and think and act in concert with those goals, then you are well on your way to achieving them.
Make this the summer you eliminate “cognitive dissonance” from your market life. Your portfolio—and your future self–will thank you.
Toni Turner is the President of TrendStar Group, LLC, is an accomplished technical analyst as well as a popular educator and sought-after speaker in the financial arena.
She is also the author of best-selling books: A Beginner’s Guide to Short-Term Trading, Short-Term Trading in the New Stock Market and Invest to Win: Earn and Keep Profits Bull and Bear Markets With the GainsMaster Approach, co-authored with Gordon Scott, CMT.