Months Like Years

Story Highlights:

• October was a bad month for stocks.
• But human perception of time tends to warp with fast-changing environmental cues.
• Undue focus on the short term, brought on by a misapprehension of time, can harm long-term investing goals.

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October's in the books. And what a month it was for stock investors. The uproar that began one fateful week in September carried over into October. The month was one of the most uncertain in recent memory as investors second-guessed the government, each other, and even themselves. It was a month that felt like a year. And on paper, there probably was enough action to fill a year or more. Yet the fact remains. It was just one month.

Why's that important? Because, as most folks know intuitively, our brains aren't wired to measure time like an atomic clock (although some savants seem to have this ability). Most folks measure time with small environmental cues, like sunlight or temperature. There are also expected social cues, like elections every two years or dinner with the family at 6pm. Emotions like fear or euphoria can change our perception of time too. If these cues deviate from the norm, how we perceive time changes. For instance, it's common for long travel to confuse environmental cues (sunlight) with social cues (dinner with the family at 6pm). Our bodies and minds are easily tricked, yet this malleable perception of time is a key factor influencing our investment decisions.

What happens when major events pile up and stock volatility rises? Our perception of time warps. The effective vaporizing of Wall Street as we'd known it for 75 years should have taken a month or a year, right? Yet, it essentially happened within a few weeks. Since then, a number of game-changing events pushed stocks down. The scarier it got, the more investors approached the threshold of throwing in the towel: "We can't take it anymore. This has been going on too long for us to believe it won't last forever. It's a paradigm shift. Our long-term goals are threatened."

But that's the crux of it. Many folks are long-term investors. Undue focus on the short term makes us think bad times have lasted longer than they have and subsequent actions can jeopardize long-term goals. When investors are checking their portfolios too often, they start feeling the need to make strategy adjustments when things aren't working out. It's why, amid great volatility at the end of most bear markets, investors bail on their long-term strategy, lock in losses, and don't get back into the market until well after stocks have soared upward.

We're not disputing that the month's eventswere historic. Nor that October was unusually nasty for stock investors. But for those with long-term goals, a relatively quick crisis is less impactful than you might now think. Smarts can help you invest well, but discipline will help you more.