A Tale of Two Theories

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Psychologists have a strategy to help cope with anxiety called the “dual model strategy.” It works like this:

You have a concern about some imminent disaster, which you believe is the source of many troubles for you. This is “Theory A.”

The alternative is that your concerns may actually be unfounded, but your fears themselves are creating your troubles instead. This is “Theory B.”

When it comes to investing, Theory A probably sounds like this: “The problem is that the economy will crash and I will lose money.” Theory B would then read: “The problem is that I worry that the economy will crash.”

If Theory A is correct, the proper plan is to pull your investments out of the market and put your money someplace safe. But there are two problems. First, we’ll never know if Theory A is correct until it is too late. Second, the economy and the markets have eventually recovered from every previous downturn. If you act on Theory A, there’s a good chance you may end up hurting yourself by acting at the wrong time. But Theory B—the idea that your worries are the real problem—is something that we can always work on.

The question is, how do you cope with your anxieties about the market? Perspective is important. Most of us are in this for the long haul, and are counting on our investment basket to provide for us for years and decades to come. Watching the market slide may be nerve wracking—but if you look back over the years, the speed bumps are barely noticeable.

Even so, it is easier to say “stick with the long term plan” than it is to live through short term bumps. There are some practical steps you can take to help cope with your market anxieties, too. Make sure you keep a cash reserve for emergencies: your investment portfolio is not a replacement for money in the bank. Also, as you reach the point in your life when you start to rely on investment income, it’s important to understand where your income is coming from. Even if you fear a downturn in the markets, it may not necessarily affect the ability of your income investments to generate cashflow for you to live on.

The key in all of this is to come up with an investment strategy that you’re comfortable with. If you continually change tactics every time you get nervous you may hurt yourself financially. If you need help coming to terms with your investment worries, please call or email us to talk them out.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.