Posted by on Jul 23, 2008 in Blog, Columns, Featured |

Image Credit: Heath Hinegardner

By Jason Zweig | July 19, 2008 11:59 p.m. ET

What goes on inside your head when your portfolio implodes?

One of the fear centers in your brain, the amygdala, can respond to upsetting stimuli in 12 milliseconds, or one-25th the time it takes to blink your eye. These brain cells fire when an attack dog snarls at you, a spider drops down your shirt or the Dow Jones Industrial Average takes a dive.

Merely reading the words “market crash” in this sentence can instantaneously jack up your pulse and your blood pressure, the output of your sweat glands and the tension in your muscles. Stress hormones will flood your bloodstream. Your eyes will widen and your nostrils flare, making you hypersensitive to any further danger. All this occurs automatically, involuntarily and unconsciously. You can’t be an intelligent investor if, without even knowing it, you are thinking with the panic button in your brain.

The countless people who bailed out of the market in the horrifying plunge of October 2002 missed out on the generous returns of 2003 through 2007, when stocks returned 12.8% annually. The same is likely to be true of those who cut and run in today’s turbulent market.

Fortunately, you can train your brain to stay calm when the markets are gripped by panic. Last week, I spent an afternoon in Kevin Ochsner’s neuroscience lab at Columbia University in New York, practicing what he calls “cognitive reappraisal.”

I sat at a computer and viewed a series of photographs, each preceded by one of two words: look or reappraise. Look was my cue to respond naturally without trying to change my feelings. Reappraise told me I should “actively reinterpret” the photo, using my imagination to spin another, less emotional scenario that could have resulted in the same image.

Dr. Ochsner had warned me to eat an early, light lunch, and I immediately realized why: I gasped at the sight of a man’s hand from which most of the fingers had been freshly hacked off. But my instruction had been to reappraise, so I forced myself to ask whether this image might actually be a still from a horror movie. Magically, the moment I imagined it was a film prop, the raw flesh seemed to look a bit like plastic, and I felt myself exhale.

If I can think away blood, you can calmly face the red arrows on a market Web site. “Emotions are malleable,” Dr. Ochsner said, “but people often don’t realize how much [of what you feel] is under your own control.”

Here are some ways you can control your fears.

Reappraise. Forget what you paid for that stock or fund; instead, imagine it was a gift. Now that it is priced, say, 20% more cheaply than in December, should you want to return the gift? Or should you buy more while it is on sale? (If rethinking a fallen price this way doesn’t make you feel better, maybe you should sell.)

Step outside yourself. Imagine that someone else has suffered these losses. Think of questions you might ask to give that person advice: Other than the price, what else has changed? Is your original rationale for this investment still valid?

Control your cues. Even witnessing someone else’s pain, or glancing into another person’s frightened eyes, can fire up your amygdala. Because fear is as contagious as the flu, quarantine yourself from anyone who obsesses over the momentary twitching of the Dow. Tear yourself away from the computer or television; better yet, while the market is closed, make an advance date with friends or family to get your mind off stocks during market hours.

Track your feelings. Fill in the blanks in this sentence: “Today the Dow closed down [or up] _____ points, and that made me feel ____________________.” Your emotions shouldn’t be hostage to the actions of the roughly 100 million other people who compose the collective beast that Benjamin Graham called “Mr. Market.” You need not be miserable just because Mr. Market is.

Finally, if the market is open, your portfolio should be closed. Sleep on any sell decision until the next day, when your fears may have faded. Intelligent investors act out of patience and courage, not panic.

Source: The Wall Street Journal