It seems everywhere you look these days in the financial media, the drumbeat for an impending market correction, or even recession, grows louder. It’s natural, I suppose, considering that the current bull market for equities is entering its 8th year, making it one of the longest in history. The truth is that some kind of correction is coming, and a recession too, for that matter. The problem is that no one really knows when, or how deep, and it’s usually triggered by something no one saw coming.

Because of this, we, as financial advisors, have a duty to be clear with our clients about the potential for declines, just as we do in the opposite case: to play the cheerleader in the midst of market downturns, when morale is low. The idea, in both instances, is to help clients avoid making emotional decisions based on short-term market conditions, which could do real damage to their long-term financial goals. (For more, see: How to Avoid Common Investing Problems.)

I was reading an article by Peter Bregman in the Harvard Business Review recently called, “Quash Your Bad Habits by Knowing What Triggers Them,” and it struck me that many of the same principles apply to investing. I’ve often wondered why some clients are able to so easily tune out the negativity and take market downturns in stride, while others seem to feel the weight of every 100 points on the Dow so acutely. But even more importantly, why some of those clients cannot resist the urge to do something, even as they understand in their more serene moments, that these are exactly the types of urges that can lead to extremely negative outcomes in the long run.

A Three Step Process

In his article, Mr. Bregman discusses the connection between counterproductive habits and the destructive consequences they have on interactions with others. His conclusion is that while habits are extremely hard to change, they can be changed and he offers some alternatives to those habits.

He outlines a three step process that I believe translates to investing as well.

  1. A moment of awareness.
  2. The ability to resist urges.
  3. A replacement behavior.

Mr. Bregman points out that we cannot hope to change a habit that we are not aware of. The first step…