Clint P. Thomas, MSF, CFP®
Justina R. Welch, MBA, CFP®
Are you debating about whether to hire a financial advisor or not? You may know a lot about the market and think that you can make investment decisions for yourself just as effectively as a financial advisor would.
But here’s something you may not have considered. When you are managing your own money, you are far more likely to make rash decisions based on two of the most powerful emotions, fear and greed.
You might not think about financial planners as sources of emotional support, but that’s one thing we do for you – we help you manage the strong emotions that come up when the market changes.
When you don’t have someone to talk to about what is going on or why you should stay invested, it’s easy to make rash decisions based on fear – decisions that lose you lots of money.
Here’s how fear and greed might lead you to make poor financial decisions, and how a good financial advisor will help you ride out the bad times, stay focused during upturns in the market, and ultimately, stay on course to meet your financial goals.
Why people make bad financial decisions based on fear
When markets aren’t doing very well, many people become fearful and want to make changes to their financial portfolios based on the news of the day or what’s going on in the world.
For example, you might see that the markets are in a downturn and decide to move everything to cash. That feels like a good idea temporarily, but then the market recovers, and you realize you’ve changed a paper loss into a real loss, and you can’t go back and undo your decision.
How to avoid making bad financial decisions based on fear
1. Stick to your original game plan
At the beginning of every client relationship, we find out your risk tolerance – in other words, how much money you want in stocks and bonds and how much risk you want in your portfolio. When we have a gauge on how you feel about investing in general, we can create a financial plan that works for you.
Once your plan is in place, and you understand your goals and what it will take to meet them, you will be far less likely to lose sleep over what is going on in the markets. If you *are* losing sleep because of fear, we will help talk you down and make decisions based on your longterm goals, rather than on your momentary fears.
2. Turn off the news
You will go through times where your fear about the markets seems to take over. When that happens, it’s best to just turn off the news, stop looking at your stocks, and do something else.
The news media tends to play on your fears, and it’s important that you distance yourself from it, calm down, and don’t let it lead you to make rash decisions.
3. Look at historical downturns
If staying away from the news doesn’t work, it may help you to look at times in history when the market struggled and then recovered. We’ve had World Wars, presidential assassinations, and terrorist attacks like September 11th that negatively affected the market. What was going on in the world and in the market was scary at the time, but over time, the markets recovered.
Even though this time feels different, and there are different circumstances, there have been plenty of things in the past that we have weathered and moved on from. It’s helpful to look at your finances with that perspective and know that markets rise and fall but historically the tread line has always been up over the long-term.
The bottom line is if you have a game plan and stick to it, you will be more likely to meet your financial goals.
Why people make bad financial decisions based on greed
Often, people want to invest in the markets that are doing well in the moment. For example, if the overseas market is doing really well and the market here isn’t, you might want to pull your money out of U.S. markets and put it all into the overseas market.
Unfortunately, when deciding to invest based on temporary upturns in the market, aka investing based on greed, most people buy high and sell low. They decide to take their money out of an investment that is doing poorly, and put it into an investment that is at its peak. This is the opposite of what you actually want to do with your money.
Avoid making bad financial decisions based on greed by sticking to a diversified portfolio
At Integrity Wealth Solutions, we believe in having a diversified portfolio. That means that we want your money invested in lots of different markets – some in large companies in the U.S., some of it in small companies in the U.S., some of it overseas, some of it in real estate, some of it in bonds, etc.
You want to be diversified because even if a particular market is doing well now, you don’t know what will be doing well down the road. This may seem like a humble, and quite frankly, boring way to invest, but it works over time. You want to be diversified all the time because no one can consistently time the market.
If you look at the calendar year 2016, large companies in the U.S. did very well, but overseas stocks didn’t do that well. So, if you were to base your 2017 investments on that and put everything into the U.S. stock market, you would have been disappointed, because the overseas stock market has outpaced the U.S. stock market so far in 2017. What was the winner last year may not be the winner next year and vice versa.
If you have a financial advisor with experience, they will know that it’s best to stay diversified and focus on your goals rather than chasing the market.
Money is emotional
It’s normal to get emotional when the markets change. When you see your stocks falling or when you see other markets doing well, it’s not unusual to become reactive and want to make decisions that feel like they make sense in the moment. However, you will probably regret those decisions later, and you won’t be able to go back and make different ones.
If you find yourself on an emotional rollercoaster with your investments, consider hiring Integrity Wealth Solutions to manage your money for you. We will help you ride out the highs and lows and create the long-term financial success you are looking for. Contact us to learn more.
