The Investor’s High

To borrow the framework of a famous Dorothy Parker quote: I hate running, but I love having run. This mentality embodies a phenomenon many refer to as a “runner’s high”.

A runner’s high is the euphoric feeling experienced after a long run. As a runner, that feeling of general contentment and well being is a huge part of what keeps me coming back for more.

But chasing the runner’s high has a cost. Running transforms the brain, cardiorespiratory system, connective tissue, and bones. However, these respective transformations are asynchronous and convoluted, making overuse injuries very common.

For example, our brain immediately responds to positive endorphins produced while running. This may occur as soon as our first run. Not long afterwards, our cardiorespiratory system also begins to adapt. After a week of regular running, our brain, heart, and lungs have begun their transformation, and are sending us positive feedback.

However, our tendons, ligaments, and bones take far longer to respond to a new regimen. Soft tissue takes weeks to adapt from gradual stress, and bones can take months.

Further complicating matters, these varying cycles are communicated differently. While the brain, heart, and lungs offer clear and frequent feedback, we often don’t know a ligament is torn or a bone is broken until it’s too late.

Investor risk tolerance is not much different.

As Jason Zweig shared in Your Money and Your Brain, “The neural activity of someone whose investments are making money is indistinguishable from that of someone who is high on cocaine or morphine.” The investor’s high, indeed.

The problem is that while confidence tends to grow commensurately with portfolio balances, our actual tolerance for risk does not respond in kind.

While markets rise, this is generally a non-issue. After all, what’s risky about investments that are growing? Volatility to the upside is not what most investors lose sleep over, so adding to what’s working and forsaking what isn’t seems safe and reasonable.

It’s only when markets fall that we realize we’ve taken on too much. Our perception of risk returns to reality, but at that point, it’s too late. Making adjustments after the fact is not a winning approach.

All of this sounds like it has a simple solution. As the saying goes, “Don’t confuse brains with a bull market”. But if it were that easy, investors wouldn’t panic sell and I wouldn’t get shin splints.

Our perception of risk may be fluid, but our portfolios should not be. Allowing our investments to reflect every oscillation in how we perceive risk is a strategy guaranteed to increase turnover and not much else.

The best advice I can offer is to make any changes gradually, and question whether they’re truly necessary before acting. Having a default setting of, “doing nothing”, is far from the worst thing in the world.