In my experience advising clients on their investments and retirement goals, there are countless times when I have also had to help them in keeping emotion in check when making financial decisions. Therefore, I would like to reiterate some of the common (and common-sense) advice that so many people forget when making financial decisions.
Don’t Let Fear Dictate Your Investment Decisions
The reason for this is that each of us has been pre-conditioned from our life experiences to instantly react to perceived threats or to situations that cause excitement. Our brains are wired in a way that instantly creates feelings of fear the moment we receive negative news. The best example of this, of course, is our reaction to a financial news report about a bad day in the stock market. At the moment we hear that negative news, our brain does not distinguish this fear from any other, such as stepping out into the street and seeing an oncoming car. Either experience creates a chemical response in the body. From there, we start generating thoughts from that fear such as “I’m going to lose all my money…” or “How am I ever going to retire?”. Typically, we find out over time that we did not lose all our money and that we can still retire as we planned. That doesn’t change the emotion we experience at the time.
Stay Focused on the Long Term
It is dangerous to make financial decisions in the moment. Calling your financial advisor and placing a sell order when the DOW is down 200 points might not be the right thing to do. What is important is to take a step back, take a deep breath, and just observe the thoughts or emotions that are going through your head. If you have done the proper planning and are well diversified in your investments and in the types of financial products you own, you are well positioned to get through the short-term shocks to the market. Remembering this will help you reframe the emotion. When your portfolio hits a bump in the road, your thoughts will change to “One day means nothing.” or “I have 10 years until I retire”, or “why would I worry about what happens today?”
Evaluate Your Risk Tolerance
This doesn’t mean that you shouldn’t re-visit the level of risk you are comfortable with. If you are still losing sleep at night worrying about the direction of the market, it might be time to consult with your financial advisor and consider a less aggressive investment portfolio. Making an investment decision in the moment, however, is never the best approach!