During periods of turmoil and above average volatility, there’s a very distinctive habit that all successful investors have formed.
That habit is making a clear distinction between which “hat” they’re wearing, and properly managing their “state” to match it.
Let me give you an analogy first.
In life, we all wear many hats. For example, a few of them for me are:
- Retirement Coach
- Sports Coach
- Conscientious American
To be effective, each of these roles requires me to have a certain mindset or “state.”
However, the correct mindset for one is unlikely to be the correct mindset for another.
For example, if I’ve been intimately engaged at the office all day, I had to have my “Retirement Coach” or “Business” hat on.
And, that requires a very specific mindset or “state” in order to be effective.
However, when I’m home over the weekend, for example, in order for me to be the father I want to be, I need to have my “Father” hat on.
If I still have my “Retirement Coach” or “Business” Hat on when I’m home, how effective (and pleasant) am I going to be?
For reasons I’m certain you can visualize, it’s going to be a disaster!
How Does This Apply to You?
Let’s carry that same analogy forward to another example.
In life, due to our experiences, upbringing, education, and interactions, we all develop our own unique set of belief systems. And, over time, those belief systems morph into our own personal philosophies which, in turn, govern the way we feel about and the way we react to various situations.
As an example, each of us has a belief system about justice and the way things “ought to be” when it comes to the role government and business plays in our lives. This certainly flares up right around tax time each year.
Let’s label this your “justice consciousness” hat!
As such, when we sit back and listen to any political figure on either side of the aisle discuss tax policy, environmental policy, or the economy in general with our “justice consciousness” hat on, each of us has beliefs about what’s wrong, who’s to blame, and how it should be fixed.
Some more strongly than others!
At the same time, each of us has developed an “Investor” hat. Hopefully, that’s based on a very specific, rational, long-term focused system like our Relaxing Retirement Formula™.
And, in order to be effective, you wear that “Investor” hat, and the proper mindset that comes with it, when making investment decisions.
When Things Get Ugly
Now, here’s distinction…..
When things are good financially, i.e. no big crisis going on, cash flow is good, and markets are moving in a positive direction, it’s easier to make the distinction between which “hat” you should wear to be effective at which time.
It’s easy to be rational and look at the long-term, big picture.
However, when things get ugly like they are right now during this Covid-19 pandemic, i.e. a crisis brews, markets turn upside down, the media outlets pile it on thick, and our reptilian “fight or flight” mechanism flares up, it becomes much harder to draw the line as to which “hat” we should wear.
The result during times like this is an inability to distinguish between which hat we’re wearing, and with it, the inability to be effective in any area of our lives.
For example, when you’re watching wall to wall coverage of the Covid-19 crisis on television, it’s highly likely that your “justice and health consciousness” hat is on your head.
That’s normal and perfectly effective for the moment.
However, it becomes dangerously ineffective when all of the emotions and fight or flight triggers that come with it are carried over to your investment decisions.
And, that’s what happens to the overwhelming majority of investors.
Everything’s fine while markets move in a positive direction like they did in 2019. However, when markets temporarily correct and move the other way (as they’ve always done and always will in the future), their rational, educated, long term “investor” hat gets thrown out the window.
In contrast, the investors who achieve the best results are those who make a very clear distinction between the two and are very conscious as to which “hat” they’re wearing at all times.
This allows them to make consistent, disciplined, and effective decisions that are in line with their carefully drawn-out plans.
So, the Strategy I recommend for you is to be very aware and conscious of which “hat” you’re wearing at all times.
There’s nothing wrong with wearing any of them. The challenges come when you mix hats or wear the wrong hat for the wrong situation.