"You might want to set that bag down." His voice startled me, but it was his tone and mannerism that really surprised me. He didn't seem the least bit nervous. As a matter of fact, he seemed amused by my obvious apprehension. I couldn't figure out how he could be so calm while I was so scared. It was the final round of the Transamerica Senior Golf Championship at Silverado Country Club and I was caddying for my brother-in-law. And while he was standing motionless over a putt that would tie him for the lead, I was standing a few feet away with my knees shaking so badly that the clubs in the bag were banging together like a castanet quintet. Being so overcome with fear that I was oblivious to the racket, my brother-in-law needed to step back and suggest that I set the bag on the ground.
After the round I asked him how he was able to stay so calm in such a stressful situation. He just smiled and said, "I just looked calm." This revelation was not an admission of weakness but one of reality. All golfers get nervous in stressful situations, even the great ones. Sam Snead admitted that "Of all the hazards, fear is the worse." Lee Trevino said, "Putts get real difficult the day they hand out the money." Jack Nicklaus acknowledged, "The biggest rival I had...was me." And Bobby Jones is famous for stating "Competitive golf is played mainly on a five-and-a-half-inch course...the space between your ears."
While amusing, Jones' description is actually neurologically accurate. In Your Money and Your Brain, Jason Zweig explains that, "Deep in your brain, level with the top of your ears, lies a small, almond shaped knob of tissue called the amygdala. When you confront a potential risk, this part of your...brain acts as an alarm system - generating hot, fast emotions like fear..." In The Drunkard's Walk, Leonard Mlodinow points out that in addition to the amygdala, other parts of the brain are also stimulated so our "response to uncertainty is complex [because]...sometimes different structures within the brain come to different conclusions and apparently fight it out to determine which one will dominate."
Unfortunately, fear usually wins the fight in the space between our ears. In Thinking Fast and Slow, Daniel Kahneman explains, "Frightening thoughts and images occur to us with particular ease, and thoughts of danger that are fluent and vivid exacerbate fear." So both golfers and investors succumb to fear because it is easy to imagine missing a putt or to visualize the stock market crashing. This is especially true if we have recently missed a putt or experienced a market crash, like the one in 2008.
The solution to the problem, according to my brother-in-law, is building habits by consistently following the same routine. Similarly, Zweig advises investors to make "...a habit of putting procedures into place, in advance, that help inhibit the hot reactions of the emotional brain." Rebalancing is such a procedure. A portfolio is in balance when the percentages allocated to stocks and to bonds are prudent. And when market volatility messes up that balance, rebalancing back to the targeted percentages is required. So in 2008, we were selling bonds and buying stocks when fear had most investors doing the exact opposite.
As a caddie, my nervousness caused the clubs to rattle. As an investment advisor, market volatility also gets me rattled. And since disasters are so easy to imagine, the reality is that I will never stop my knees from shaking. But that doesn't mean when financial markets are all shook up and my nerves are rattled that I react emotionally. My habit is to act prudently. I shake, rattle and roll into my rebalancing routine.