Your Money & The Coronavirus

The corona virus only became a market worry about a month ago.  The volatility is expected to remain short-term but there is every reason to believe that the market will return to normal.

#Investing Emotionally

Our decision making is susceptible to emotional responses which can lead to unsound financial decisions.  “In a perfect world, decision making would not be impacted by emotions and biases.  There would be an understanding of the tradeoffs between risk and reward, and rational decisions would be made toward money.”

We have very little control over circumstance of our lives, particularly money.  We can control savings, spending and investing.  A trusted financial advisor can provide objective, unbiased recommendations to help traverse the financial arena.

Unfortunately, we are wired to think emotionally first.  The primitive part of our brain that controls unconscious, reactive and impulse actions – the limbic system, is triggered first.  Also, the presence of cortisol can prevent blood flow to this section of the brain to further impede logical thinking.  The Prefrontal Cortex which controls logical, thinking and reasoning is triggered after.  Our brains can be impacted positively or negatively in times of stress – fight or flight.

Common biases to rational thinking which can lead to poor financial decisions:

  • Overconfidence – “I know what I’m doing!”
  • Blind Love – “But that’s my favorite!”
  • Loss Aversion – avoid pain of loss over making a gain
  • Short-term Bias – short-term decision over long-term perspective
  • Herding – “If Bobby jumped off a bridge, would you jump too?”
  • Anchoring – hearing what you want over total info
  • Optimism – “It won’t happen to me!”
  • Regret – “To be or not to be?”
  • Confirmation Bias – find specific info to support your choice

The Impact of Emotions on Financial Decisions:

  • Rational thinking is difficult when emotions are involved.
  • Generalities & over-simplifications are sometimes inaccurate during times of volatility.
  • Our motivations can unduly influence us.  Are you conservative, competitive, a risk-taker or cautious?
  • Our feelings may over-ride our thinking.  Did you lose a job, going through a divorce, lose a loved one?
  • Trying to match the crowd’s reasoning on a decision may not work in your circumstances.

“During period of extreme market swings, individual investor results lagged behind the indices in which they invested in.” 

Recommendations from a #trusted advisor, who sidesteps emotional thinking, can prevent #panic selling and abandoning your #long-term financial goals.

*Excerpted from Ladenburg Practice Management The Impact of Emotions on Investing

 

 

 

 

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