At what point will you hit the panic button?

By Larissa Fernand |  14-09-20 | 

In 1965, psychologist Howard Levanthal wanted to see if he could persuade a group of students at Yale University to get a tetanus jab.

He gave all of them a booklet explaining the dangers of tetanus and the importance of inoculation. One version of the booklet was to induce fear and to that effect, employed graphic terms and photography. The other was much more muted in its presentation with no photographs. Later, in a questionnaire presented to this group, those who accessed the high-fear booklet revealed more conviction of the importance of getting the vaccine and were keen on getting inoculated.

A month down the road, only 3% of those who participated in the exercise took the free tetanus jabs at the campus health centre.

What does this tell you?

Knowledge does not necessarily lead to the desired behaviour. Information does not necessarily lead to the desired action. Awareness does not necessarily lead to application.

Now apply this to your financial situation.

We all are aware that the stock market can undergo a precipitous fall. That downturns are part of the terrain. That we should embrace market slumps as valuations are low and we can add to our position.

Logically, we are all in agreement. Intellectually, we concede with the eventuality of a market decline. Yet, we fear it.

Which brings me to the next question: What is your tipping point?

Nick Maggiulli makes it much more practical by asking: What is your personal selling point?

Below is his explanation on how he arrived at his.

Consider your current net worth (all assets minus liabilities). What number would your net worth have to reach, as a result of a market crash, for you to give up all hope and sell your equities?

I used to believe that there was no number at which I would give up hope and sell stocks. Markets always recover. At least in the U.S. this has been true. But, I realized that there is some psychological number in my head at which I would not be okay. After doing a simple calculation (tipping point/current net worth – 1) I realized that I would need to see a portfolio decline of 63% across my total portfolio before I truly panicked.

Russ Hanneman in HBO’s Silicon Valley reached his tipping point when he went from a billionaire to a millionaire and lost his status as a member of the Three Commas Club. Similarly, you might have $1.3 million in a retirement account at age 65 and feel great, but a 30%+ decline and you are no longer a “millionaire.”  That psychological re-labelling of your identity might be enough to force you to sell.

- Nick M.

It was the way Nick articulated the above that got me thinking about tipping points when it came to finances. Along the lines of Hanneman mentioned above, I know of people who would be disturbed to note that their stock market exposure is less than Rs 1 crore.

I have not yet done the math which would make me arrive at a number that would trigger my panic button. This year, when the market crashed as a global lockdown got implemented, my portfolio’s value decreased by 25% and I was not in the least bit perturbed. But I think a drop of more than 50% would make me queasy. Even the theoretical knowledge that the market will bounce back would not ease my discomfort.

It is things like this that you have to consider in addition to your financial goals and liabilities. Being aware of your financial tipping point will go a long way in helping you get the right asset allocation and the investments most suited for your temperament.

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