The Return of Chicken Little
Don’t believe all you hear — and don’t let emotions dictate your investment decisions
When news commentators, Web sites and even people you know recite dire warnings about the future of the economy, do you believe them?
If so, you could be suffering from a psychological phenomenon known as catastrophizing. Psychologists also refer to it as Chicken Little Syndrome, named after the children’s fable (see sidebar below). Catastrophizing occurs when you draw an illogical, irrational and catastrophic conclusion from an insignificant fact.
Say it’s raining hard, a real downpour. A victim of this phenomenon might say, “I bet it will never stop raining! There’s going to be a huge flood!”
Absurd, you say? Of course. But even worse is allowing unbridled emotions such as fear, discouragement, frustration or downright panic to influence your money-management decisions.
That’s what was happening to a person who called my radio show in August, just one day after Standard & Poor’s lowered the nation’s debt rating from AAA to AA-plus. The news was a stressful event for everyone, to be sure, but this gentleman had taken the news a bit farther than most.
“I’ve taken a 10% loss this past month. Now I’m wondering what to do... [ I ] thought this might be a correction, but I think it’s more like a recession or possibly a depression…the [entire] structure of our economy is in the toilet. …”
Wow. He went from a 10% decline in the past month to economic depression, then all the way to the demise of the very “structure of our economy.”
I’m sure he wasn’t happy with me when I suggested he could be “the poster child for catastrophizing” and a couple of other psychological behaviors.
His frustration is completely understandable. So is his anger. Frankly, I share both of those sentiments for, indeed, the market turmoil that we experienced in July and August was completely avoidable. Congress and the White House failed to take the actions that were plainly required, setting the stage for what followed.
But where the caller and I part ways is over our actions. While he allowed his emotions to cause him to abandon his long-term investment strategy, we didn’t let our frustration or anger interfere with ours. Like Chicken Little, he felt the world was coming to an end; we regarded it as a wonderful buying opportunity. He believed that current negative events would persist; we realized that corporate profits remain strong, that the economy is still growing albeit slowly, that unemployment numbers and housing prices are slowly improving — and that there’s an election just 13 months away. We realize it’s silly to conclude that current events will remain unchanged for long; he fails to understand this important point.
And it wasn’t the only way my caller was allowing his emotion to influence his actions. He also demonstrated displacement, another psychological behavior whereby one transfers onto someone else the blame or frustration he or she is feeling. Think of kicking the dog because you had a bad day at the office.
In this gentleman’s case, he blamed me for the fact that his portfolio had lost 10% of its value in the past month. (He said he’s not a client of our firm). I didn’t take his verbal assault personally because I realized he was just venting — an act of displacement.
Yes, today’s volatile times can make you jumpy, frightened, sad, frustrated, angry — or all the above. That’s fine. In fact, that’s a reasonable, rational response to recent political and economic events. But don’t allow those emotions to alter your investment strategy. Flailing about in the sea will not help you reach the beach.
Instead, develop a disciplined approach to money management — diversification, rebalancing and a long-term perspective — and stick with it. That’s what we do for our clients, and it’s an approach that will serve even Chicken Little.