Mindful Investing

Articles about the benefits of meditation are everywhere these days, and for good reason. The past few years have been unusually stressful, and people are looking for non-addictive, healthy ways to manage their stress and anxiety. Thus, I got interested in mindful investing.

While meditation has been practiced for centuries (primarily by practitioners of various religions), it has surged in popularity recently and is now routinely practiced by celebrities, schoolchildren, office workers and even the military. Reams of scientific studies have shown that meditation is extremely effective at relieving stress and anxiety, lowering both inflammation and cortisol levels in the body. In fact, meditation — specifically the practice of mindfulness — has become so mainstream that the CFA Institute now offers a Meditation Guide for Investment Professionals to all CFA charterholders as part of their continuing education.

I began my own investigation of mindful investing a little over three years ago when I was looking for a way to manage my increasing stress levels. While I am by no means an expert, I have picked up some useful insights via the practice and study of mindfulness meditation, and it is clear to me that some of these techniques would be useful when navigating the emotionally charged and behaviorally biased world of investing.

If you are under the impression that investing is a rational, analytical, fact-based science, you would only be partially correct.

While we endeavor to approach investing in this way, we are still human and as such, prone to behavioral biases. In fact, the academic discipline of behavioral finance was created to study and name our irrational impulses: hindsight bias, confirmation bias, overconfidence, herding and loss aversion, to name a few. Without going into exhaustive detail, suffice it to say that when it comes to investing, our emotions often turn us into our own worst enemy, causing us to make decisions that fly in the face of an otherwise rational investment discipline. For exhaustive detail, you can watch Parsec CEO Rick Manske’s 90-minute webinar “Planning for Uncertainty, Acknowledging Your Biases and Building Emotional Intelligence.

When you engage in the practice of mindfulness meditation, you focus not on shutting out thoughts (a common misconception) but rather on becoming aware of your thoughts. Our internal dialogue creates a narrative of which we are generally unaware, which may lead us to take actions that are detrimental to our success and happiness. Thoughts borne of fear and anxiety can be very powerful in this way, until you recognize them for what they are — merely creations of the mind.

For most people, investing is fraught with emotion.

You are putting your hard-earned money at risk to suffer the whims of the market, with the hope of attaining a long-term goal (education, retirement, charitable giving, etc.). It is tempting to give in to anxious thoughts in the face of uncertainty and make sudden changes to your portfolio that undermine these goals, causing you to sell low, buy high and otherwise jeopardize the outcome. If you cultivate awareness of these thoughts and tendencies, however, you have a better chance of recognizing them for what they are and resisting the urge to give in to them. That is mindful investing.

While it seems like everyone is touting mindfulness these days, there appears to be real scientific support for its benefits. Even if you don’t undertake a formal meditation practice, a concerted effort to recognize deleterious tendencies could go a long way to improving your investment outcome and your peace of mind.

Sarah DerGarabedianSarah DerGarabedian, CFA
Director of Investment Management

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