Let’s say you’re out for a jog and notice a car driving erratically, aiming toward you. That’s when your brain’s fight or flight system takes over. You make a split-second decision to jump out of the way. Your fight or flight function potentially saved your life because your subconscious brain made a millisecond decision to get out of danger.
However, when it comes to making financial decisions, it is a very different story. We are not built to make quick, subconscious financial decisions. Our brains are built to feel before we think; thus, we can sometimes let emotions drive our decision-making process. The emotions we feel while trying to make a financially driven decision are only natural. Imagine you wake up to the news that the stock market is plummeting because of some tragic event. You will immediately feel a rush of fear and uncertainty, and your emotions will likely take over well before any logical thought has had time to evolve. That can lead to bad decision making, which can negatively affect your goals, needs and objectives as it pertains to your finances.
Maybe you call your adviser requesting to sell out of all equities or maybe you go on to your custodian’s website and place the trades yourself, thinking you are fleeing from harm’s way. The reality is you probably did not allow enough time to pass to recognize you are about to make a bad decision. Without consulting a financial expert, selling everything could affect your long-term financial plan.
Although the example above is exaggerated, Dalbar, Inc., the nation’s leading financial services market research firm, shows that the average equity fund investor’s return for the 10-year period between 2006 and 2016 was 3.64 percent. The average return of the S&P 500 Index over that same time was 6.95 percent. This shows that the average investor makes poor decisions on when to enter and exit the market.
In times of feeling overwhelmed when making financial decisions, take a few minutes to think things through. Take a few deep breaths and recognize what’s going on — your brain is doing what’s natural. Take five minutes to save yourself from making a fear-based rash decision. Just like you go to the doctor when there’s something wrong with your health, it’s important to consult with a financial expert who can guide you through a time when you might make a bad financial decision.
To get the most out of investing, a person needs discipline and patience. That means that you need to learn to leave your emotions behind. It means that a financial plan with a definitive investment strategy needs to be in place to provide structure to your investment regiment. If you think you’re going to beat the market year after year, then you are living with a false perception of investing. Never believe someone who tells you that they always pick winners. Everyone has had a loser.
Staying disciplined and staying the course means you must understand that the urge to sell in a down market is natural, but you cannot let the emotion win. It’s important to slow down the process and consider all relevant factors and possible outcomes when making financial decisions.
Taking the time to understand the context of your own investment mentality will help you keep your own personal sanity. If you find yourself guilty of letting your emotions influence your financial moves, a financial adviser can help you determine if you need to take corrective action.