By Michael J. Searcy
In our current market, we’re seeing changes daily and some are drastic enough to spook even the most seasoned investor and cause them to make decisions outside of their best interest. How have the market changes been affecting you?
If you were to ask yourself whether you make decisions based on headlines and short-term volatility scares, you would probably believe those issues wouldn’t affect your behavior. We tend to believe that we will always make the most rational, considerate decisions. However, controlling your emotions during volatile markets and staying rational isn’t as easy as you might think.
Decisions we make regarding money are not always made in our best interest because our emotions can get in the way. Sometimes we may realize our emotions are playing a big role in our decision making process, and sometimes we may be unaware of their effect.
Why does this happen?
To understand it, we have to consider Behavioral Economics, the study of subjective factors’ impact on economic decisions. The more you understand how Behavioral Economics impacts your decision making skills when it comes to finances, the better you may understand the results of financial decisions you have made in the past. And perhaps, you can harness the knowledge to make more rational decisions in the future.
For example, if you were to receive a year-end bonus during a time with rising market conditions, chances are you would follow your normal investment behavior: max out your retirement contributions, fund your 529 plans and deposit the remainder into your long-term investment account.
But what if the markets were rocky?
You might find yourself calling your financial advisor and asking them to keep that bonus in cash because it seems safer. In this scenario, you can quickly lose sight of your long-term strategy due to short-term emotions.
Do you have someone who can help you stay out of your own way?
When we see clients trending toward decisions that aren’t in line with their goals, goals created during rational times to guide their long-term plan and strategy, we can help put things in perspective. We are able to re-look at that original plan and discuss how short-term emotions and behaviors could be fighting against their future goals. We talk about the emotional rollercoaster of investing, explain downside recovery math, encourage the long-term perspective, and emphasize the benefits of their diversified investment strategy.
Finances, by nature, are deeply personal and can stir up emotions you may have never seen coming. Among other reading and research on behavioral economics, “Why Smart People Make Big Money Mistakes,” by Gary Belsky and Thomas Gilovich is a book we find useful in communicating the subject matter. If you’re interested in the topic or curious which behaviors you might be practicing, we encourage you to pick up this book.
Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.
The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.
Published for the blog on January 17, 2019 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.