Fear Itself

Friday, March 13, 2020

By: Christopher Cline

We’re all familiar with the quote from President Franklin D. Roosevelt, made at his first inaugural speech in the depths of the Great Depression. But at this time, it feels right to give the whole quote: “let me assert my firm belief that the only thing we have to fear is...fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” In this, our third piece about the financial havoc wrought by coronavirus, we’d like to talk about fear.

In our first two pieces, we provided the standard responses to market volatility: stay the course, markets always recover after a big fall. And those statements are undoubtedly true. But they don’t acknowledge the fear we’re all living with. The economic consequences will almost certainly be less severe than those of the Great Recession, and will definitely be less than those of the Great Depression. But to say so is to ignore the raw emotion generated by our present circumstance.

The fact that the current economic upheaval will be less severe than that of 2008-09 is little comfort to the hospitality worker who is laid off. The fact that eighty percent of those who contract the virus will avoid the most serious symptoms means nothing to those caring for the most vulnerable. We are facing the most divisive presidential election since the Civil War. We live under the looming and exponentially growing threat of climate change. And the “social distancing” that is so important to reducing the spread of the virus will only make us all feel a little more alone. The road to our healing has to begin with acknowledging the enormity of the problems we face.

Once we’ve acknowledged those problems, however, we must squarely face the fear they engender. Fear is a powerful survival mechanism. It stimulates the “fight or flight” response that was so important to the early survival of our species. For us, however, that response can be harmful. When we can’t fight (and who can against overwhelming forces like disease, politics and economics?), we retreat. Our impulse is to retreat into our political tribes, our homes or (with our investments) into cash. And retreating never solves big problems. I think that’s the main point FDR was getting at, and it’s still valid today.

Advancing in the face of fear is hard. As we discussed in the lead article from our recent newsletter (https://riverviewtrust.com/resources/quarterly-insights/fourth-quarter-2019/), humans have a “negativity bias” that is stronger than any bias in favor of good news. In fact, social scientists observe that negative emotions are four times stronger than positive ones. In times like these, when the bad news items outnumber the good already, the effect can seem overwhelming.  So once you’ve acknowledged all the bad news in the world, be aware of how deeply it may be affecting you. Once you’ve done that, then you can advance.

What does advancing look like? In a time of social distancing, it might mean calling a friend rather than texting or social media posting. It means taking all the health precautions you need to, but at the same time reminding yourself that it will end (every handwashing is one step closer to stopping the virus). In politics, it means reminding yourself that both sides of the debate are just as scared of what might be coming as the other.

And in investing, it means reminding yourself of the enduring (if somewhat boring) truths:

  • Selling in a down market simply means locking in your losses.
  • Make sure you have enough cash on hand (maybe six months of expenses or so) if you’re living on your portfolio earnings.
  • You may have just benefited from the longest bull market in history, so this bear market was an inevitable (albeit painful) occurrence that was long overdue, and you’re still ahead of the game.
  • If you stay the course with your investment strategy, your losses on paper will become gains.
  • No one consistently outperforms the market over the long run, and the odds of successfully timing the market are incredibly low.
  • However, if you have extra cash that can be invested for the long haul, go ahead and do so.  We agree with Benjamin Graham that there is a difference between “timing,” defined as an attempt to guess what the market is going to do next, and simply observing that the market has gone down and securities have become cheaper. 
  • And finally, remember that the “investment news media” is out to sell ad space, not give you advice. And they sell that space by providing you with bad news to trigger that negativity bias.   Jim Cramer and all the other “pundits” are entertainers, not investment advisors.  

We’re in this together. We want all our clients and friends to reach out when they’re feeling fearful about their investments. Let’s fight the “nameless, unreasoning, unjustified terror” together.