For many years, our firm has been guiding clients by not only building comprehensive wealth management plans, but also figuring out what it all means to you. We may talk about not only how much money we have, but what we want our legacy to be. Or not only how much can we live on per year, but what we want to do with our time. Another interesting one is about investing specifically. We often discuss what the markets are doing, but something very important is how we behave when they go up or down. This is what I want to cover in this article.
The year 2022 in the markets has presented us with an opportunity to experience all the emotions one could as it relates to watching our investments. We would have to go back to the 1970’s to find a worse start to the year. So, when we watch the news each day, or open our statements like we did last quarter, we may have very strong feelings associated with that. Uncertainty, doubt, despair, and lots of questions come to mind as we take that moment in time and project what it means to our future. It combines not only the reality of the current situation, but also other patterns we may have as it relates to money including our history, our innate perceptions, as well as how we perceive the world. On top of that, something chemically in our brains is also at work. That’s a lot of stuff.
There is an area of research within our industry called behavioral finance which spends time analyzing how and why we do what we do when it comes to money. Research has found that when people perceive they are losing money, they shift into fight or flight mode. In other words, they move from the logical part of thinking to preservation mode; hence fight or flight. This is the part which seeks protection from danger, enabling our sympathetic nervous system in preparation for stressful events. When this happens when it relates to our money, we tend to react like we are being chased by a bear. We end up using primal thinking to solve problems related to things that we need our critical thinking for and end up making decisions which end up colliding with both worlds.
When we have market environments like we have this year, we spend each day at our firm talking to people, many of whom are in fight or flight mode. The questions may be different, but they all represent the same types of things. Am I going to be ok? What does this all mean? Fortunately, we are very well trained in this understanding and do all we can to address each situation with this in mind. We know it is hard to ask someone what is important to them about retirement when they feel there is a bear behind them, but the first thing is basic knowledge of where we all are on the journey. Second, once we have this understanding, we can step back and take a bigger view on what this all may mean in the long term. Finally, when we can get our parasympathetic nervous system working again, we can return to a place of logical thinking. We fully know that this is not an easy task by any means. After all, if we all know that buy low and sell high is the mantra for investing, why would so many people do just the opposite? We understand this. With all of this in mind, we believe this is an opportunity to give a greater explanation of how behavioral finance can provide extremely valuable information as it relates to long term wealth planning. We believe it’s priceless for all involved.
Investing involves risk. No investment strategy can guarantee positive results. Loss, including loss of principal, may occur. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice. Keep in mind that current and historical facts may not be indicative of future results. Diversification is an investment strategy that can help manage risk within a portfolio, but it does not guarantee profits or protect against loss in declining markets.
This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. (C) Twenty Over Ten