Covid-19 global pandemic. Supply chain shortages. Rising lumber, housing and grocery prices. A never ending, divisive political news cycle, social discord, and rising inflation rates. The past two years have been one crisis after another, and to say it has created a lot of stress for many people would be an understatement. Short-term and chronic stress can negatively impact decision making. But there are ways to avoid making bad investment choices under duress.
Despite these stressors, life goes on. Decisions — big and small, life changing or trivial — must still be made. Humans are not always great at making rational decisions during good times, but stress may lead to poor investment choices.
Psychological research has pointed to several causes.
Heightened stress levels cause our attention to narrow. Humans already have a tendency to focus on often irrelevant, but readily accessible, characteristics when making decisions. Factors like the familiarity bias and recency effect lead individual investors to overweight growth stocks of companies’ products they use (Apple, Netflix, Amazon, Facebook, Google) or to buy crypto (junk) coins recently in their twitter feed — habits that result in lower returns.
When news headlines are negative and overwhelming, investors use decision making shortcuts (heuristics) to simplify information processing. While this may save energy, it means relying heavily on superficial information for making decisions. Similarly, panic selling at the bottom just because Bob at the watercooler ‘got out of the market and went to call cash’ and all ‘indicators are flashing red’ may ease our acute stress, but it’s unlikely to be a good investment decision. Most market downturns recover in approximately 30 to 40 months.
Before you make a decision, pause and consider 4 questions.
Before you call your broker or click on your smartphone, take a day to sleep on your decision. Write down answers to the following four questions before you act:
How much can you afford to lose and still sleep at night?
What is your time horizon for holding this investment?
What specific goal are you trying to achieve?
Is this investment congruent with your long term financial plan?
Many investors “stir up” their investments when major political or global events happen. Or, when major life changes occur such as births, marriages, or deaths. They seem to get a renewed interest in their stocks and/or begin to second-guess the effectiveness of their long-term strategies. Your trusted financial advisor can help you focus on your long-term objectives and help reduce the influence of stress which can hinder meeting your financial goals.
Final thought.
Do you have written financial goals? Is stress causing you to re-think your investment strategy? Are there significant changes happening in your life?
Peak Wealth Planning meets with clients in Champaign and Chicago, Illinois, as well as in Colorado near Denver, Winter Park, and Fraser.
If you have a net worth over $2 million and need help from a wealth manager, the Peak Wealth Planning team can assist you.
Peak Wealth Planning specializes in helping high-net worth individuals and families plan for the future.
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About the Author
Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning guidance. Peak Wealth Planning is a fee-based financial advisor based in Chicago, Illinois, and Colorado.
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