What spirit animal are you?

Opinion

Markets surge and retreat on growing volatility driven by the collective feelings of hundreds of millions of investors.

These “animal spirits” — a term coined by economist John Maynard Keynes to describe how instinct and emotions drive economic activity — have leaned toward greed, exuberance more often than not with the U.S. and Canadian stocks markets recently reaching all-time highs.

Maybe investors are euphoric about the impact of artificial intelligence or perhaps many buy what U.S. President Donald Trump is selling: a so-called new “Golden age of America.”

Whatever the driver, these animal spirits give some investment professionals pause.

That includes outspoken Toronto portfolio manager and author John De Goey, who recently discussed the irrational exuberance of do-it-yourself investors when he was a guest speaker at an event for the popular Money Show podcast.

“People aren’t quite day traders, but they more and more like momentum traders or noise traders, making decisions based on what’s in the headlines,” says the author of Bullshift: How Optimism Bias Threatens Your Finances.

Overall, investors are favouring irrational optimism over realism.

“A cut interest rate is basically a sign that the economy is weak, but when rates get cut, what happens? Markets celebrate,” De Goey says.

Overall, investors have been enthusiastic for many weeks in the face of data and factors that may suggest they have better reasons to feel fearful or at least cautious.

While it’s important to invest in markets, an activity that is generally intrinsically optimistic simply because it involves putting faith in future economic growth, being mindful of how the animal spirits can move us helps avoid taking on too much risk, says a Toronto-area clinical psychologist.

Dr. Houyuan Luo, founder and clinical director of MindPeace Psychology, appeared in a recent RBC feature article titled “Revenge Investing and the Power of Discipline.” Aimed at a do-it-yourself investor audience, it suggests investors are generally behaving like consumers did in the aftermath of the COVID-19 pandemic.

Yet rather than revenge spending, they are revenge investing, hoping to catch up on saving for the future. It adds that although that sense of urgency is beneficial if it encourages them to find extra money to invest, revenge investing may have the opposite impact if investors are in too much of a hurry to catch up.

“This is emotionally driven behaviour,” Luo says, citing the well-known term FOMO (fear of missing out).

While it is also a beneficial motivator in limited amounts, generally speaking, any time fear is involved in investment decisions, these tend to be knee-jerk responses. And those quick decisions — often in absence of a rational strategy to support them — are likely to lead to poor outcomes, especially when markets regress.

That’s when fear kicks in again, only the fear of losing money this time around. That push and pull between greed and fear are unavoidable because “they are part of human nature,” Luo says. “So the question becomes how we manage them.”

First, we need to recognize the emotions in ourselves. Then, take steps to curb their impact, putting in place circuit breakers to give yourself time to calm down to be able to think rationally.

“So shut down the laptop, take a walk outside, and find distraction from the markets,” Luo says.

Another way to tame your inner animal spirits is having an investment strategy designed to achieve your goals (i.e. retirement), says Michael Sherman, head of behavioural science and economics at RBC.

“Discipline and patience are considered the hallmark of good investing,” he says, noting the best investment strategies involve both. “That’s because when it comes to financial decisions, emotions are not your friend.”

One challenge today, however, is many mistakenly believe they have a good strategy in place because their recent investments have done so well.

Yet Sherman says investors should challenge that notion. Are you confusing skill with luck? For lay investors, they often are doing just that in rising markets. It’s what behavioural economists refer to as the Dunning-Kruger effect, Sherman says.

This cognitive bias describes how people with limited knowledge about complex issues often feel they know more than they actually do, especially if their recent experience is one of success.

So while our portfolios may be performing very well, Sherman notes much of the upside may be a result of good fortune.

Even though investments like stocks involved in artificial intelligence have powered returns, he encourages investors to have reasonable processes in place.

Notably, he suggests investors regularly commit weekly or monthly sums into a diversified portfolio. Referred to as dollar cost averaging, it helps manage greed and fear because whether the markets are up or down, you’re still investing according to your goals. What’s more, it helps reduce the likelihood of chasing hot new investment ideas and getting off track.

Of course, emotions can insidiously subvert those good intentions.

“So to counter that, take time to cool off when the emotions come, and then you can always revisit your plan if you decide it needs changes,” Sherman says.

But make no mistake, investors need a plan in most cases to increase their chance of successfully reaching their goals, Sherman adds. “Otherwise, you tend to be rudderless.”

And you’re likely to end up as prey to those animal spirits.

Joel Schlesinger is a Winnipeg-based freelance journalist.

joelschles@gmail.com