By Dr. Charles Patterson, WCI Columnist

I’ve several strong pet peeves. Among them are stepping on the flotsam and jetsam of toys strewn about my living room (thanks, kids!); improper use of the word “literal;” and, worst of all, evocative language. Evocative language is a choice of words, phrasing, or delivery that is intended (consciously or not) to evoke in the receiver some reaction or behavioral change. Examples abound from the seemingly harmless, “Are you sure?” to the more exasperating, “I need you to take care of this now.”

(For the record: no, I do not need to take care of that right now.)

In medicine, charged language is equally vexing and ubiquitous. For instance, the term “big-gun antibiotics” intones some sort of nuclear-esque approach. But Meropenem or Amikacin are by no means the howitzers implied—they are simply drugs that work by novel or different mechanisms. The term “see how she/he does” also makes my list. For goodness sake, we’re not throwing dice and seeing what happens! We’re executing a plan and anticipating temporally related effects. Even the improper use of “brady/tachycardia” or the cavalier assertion of “near fever” can compel a care team to act differently.

If this seems pedantic, remember that the decisions we make cost money (oftentimes lots of money) and reverberate through the course of care. Semantics in medicine is anything but trivial.

The semantics of finance are also fraught. Whether it's confusing insurance for investing or conflating loss of value with loss of capital, the words chosen by the industry (and we as investors) to describe markets and strategies directly influence our interpretation of reality and, in turn, our decision-making. When financial success requires naught but a reasonable plan and fortitude, missteps occur when we lose situational awareness, get discouraged by our own misgivings, or feel enticed by the next new thing. Frequently, these pitfalls are wrapped in evocative language like “increased rate of return” or “passive income” or (my least favorite) “unprecedented.”

Here’s a blessedly short diatribe on this latter term: market history is littered (not literally) with the unprecedented. Every market high is unprecedented. Novel technologies and fads (things labeled dot.com, mortgage-backed securities, digital currency, artificial intelligence) are always unprecedented. Fed moves and political trends are periodically unprecedented. And with each craze and trend, the choir of analysts and false prophets scream, hell-bent on convincing you to change your investing behavior.

“Passive,” “unprecedented,” and “literal” may be common and accepted terms, but they can hardly, if ever, be taken at face value. In the following paragraphs, I will expand on this sentiment and describe a means of maintaining composure when confronted with evocative language in finance.

 

Regulating Your Response to Finance Noise 

The words used to describe market dynamics have an impact on behavior. As mammals, we evolved with a sense that when one of us called out “danger!,” the rest responded by grouping together to flee. The amygdala is a wondrous structure that undoubtedly kept many of our ancestors alive. It's particularly handy when responding to bear encounters and when driving in LA. But when it comes to responding to talking heads and gurus, the amygdala is a hindrance. A goal-oriented, tolerant, and patient approach to portfolio management ensures that in this one-person race, you remain the tortoise, not the roadkill.

While it may seem obvious, financial planning is an executive level function. Execution, in contrast, should be automatic and somewhat brainless. By this approach, we more easily stay the course, which in turn parries the portfolio changes that cost us dearly in the long run. Unfortunately, we tend to dispense with this paradigm when those around us are losing their cool. It's not unexpected, of course: we are wired to survive by responding to alarms. Keeping our response at the level of the cerebrum is critical in protecting ourselves . . . from ourselves. Mindfulness of long-term goals is an important resistor to change. By looking beyond short-term market variation (or the next big thing), we tolerate the fits, dips, and jumps that would otherwise promote change.

Seasoned investors have said that those new to investing should get down on their knees and pray for a recession early in their careers. This serves three critical purposes: 1) this experience is an excellent teacher of risk tolerance; 2) it allows one to buy at market lows early, as opposed to selling at market lows later; 3) it establishes the tenor for a long-term investing career. If chaos strikes early, ensuing chaos will elicit an attenuated response. This is the reason I want old doctors and old nurses and old respiratory therapists on hand if I code: cooler heads make for better outcomes. Cooler heads are forged through experience.

In the same vein, it would behoove us when we're planning to know when exactly (or under what circumstances) we would change the complexion of our investments. It may be completely reasonable to change your approach—especially if previous iterations of your financial plan were haphazard, were drafted by an insurance salesperson masquerading as an advisor, or were otherwise susceptible to frequent or large alterations. Plans should be comprehensive enough to resist market changes and strong enough to withstand your change of heart.

As long as entertainment and market analysis are linked, there will be talking [yelling?] heads willing to drive up ratings by distracting you from what matters most: staying the course. Through evocative language, selective reporting, and charged word selection, amygdalas will be triggered and mistakes provoked. Robust financial planning and a predetermined response are excellent antidotes.

More information here:

Why You Should Ignore the Financial Media

Can You Spot the Unbelievably Bad Financial Advice on These TikToks and Tweets?

 

3 Steps to Checking Your Response

How do you respond when everyone around you has their hair on fire because “the market is crashing” and, unlike all previous crashes, “this one is different?” Yesterday is the time to answer that question and formulate a plan. Fortunately for the buy-and-hold strategist, there will be ample opportunity to practice. I propose a three-step approach in response to the near-constant barrage of market catastrophism and FOMO-inducing novel bad-idea peddling.

financial semantics tuning out the noise

  1. Gain Situational Awareness: When the market is down 10%-20% (as happens about every 1-3 years), first take stock of your feelings on the matter. Are you unnerved? Indifferent? Are you wary of your exposure? For the young investor, these early-career corrections are excellent opportunities to gauge risk tolerance. Beyond that, be cognizant of the fact that while the value of your shares may have decreased, your position in the fund hasn’t. Spreadsheets that highlight growth in position in addition to value support a buy-and-hold mentality.
  2. Recharacterize the Narrative: Analyzing events and synthesizing them on your own terms normalizes the “unprecedented” as par for the course. A healthy dose of skepticism is warranted whenever a pundit speaks in absolutes or with the claim of unique insight. Further, if your analysis is divorced completely from all but the most extreme, exercise caution. A balanced perspective, spoken in plain language and with credence to differing opinions, is rarely the nidus of poor decisions.
  3. Reframe the Impact: Which is more likely: the histrionic man on TV shouting total market armageddon or that the total market fluctuates—sometimes wildly—but in general grows? Which of these perspectives is more likely to encourage healthy contribution and monitoring of investments? Carefully framing the impact of finance semantics lends insight into their motivations.

More information here:

The Ethics of Investing

 

The Bottom Line

I find that Rudyard Kipling’s words are particularly salient when he wrote:

“If you can keep your head when all about you
Are losing theirs and blaming it on you . . .
Yours is the earth and everything that’s in it . . .”

Life in the hospital can be frenetic, disturbing, and jarring. But how much better are our outcomes—and how much healthier are our work environments—when we operate with a level head, confident in our training and contingency plans? Our word choice, body language, volume of our voice, and cadence all convey a sense of control. Whether we have actual control doesn’t matter, because we are affecting those around us (and maybe a bit of ourselves). This precept holds when it comes to investing, and we would be wise to adopt a means of self-control.

One day late last year, after my foot found the business end of a plastic triceratops left haphazardly on the floor, my wife gave some sage advice in response to my pained cursings.

“Try not to speak,” she said.

It was great advice for many reasons, not the least of which is that most of my thoughts are best left unvocalized. Somewhat ironically, my voice seems to be one of her pet peeves, and sparing words has been a fascinating experiment in improving our home life. The lesson is universally applicable: language determines the tenor of an environment, and, more pressingly, language prompts response. Silencing the noise is a critical skill that investors must master to avoid unnecessary change.

The views expressed in this article are those of the author and do not reflect any official position of the Department of Defense or the US government. These writings are not authorized, approved, or endorsed by any of the above entities.

Is it difficult to tune out all the financial noise and stick to your plan? How have you managed to do it? Or have you, at some point, succumbed to technology and fads? What happened? Comment below!