Investment news sources would lead you to believe that this is what the world looks like for you this week.
By now, you have likely read headlines from the past week and a half talking about how the market has in a roller-coaster up and down. You may have heard one-liners such as “The Dow has moved 1,200 points this trading session” or CNBC’s weekend leading “Dow swings more than 22,000 points in wild week.” It’s pretty hard to ignore when these sort of quips are jammed into phone notifications, Facebook news, in the ticker at the bottom of a screen while watching something else, in print media, and of course from every financial firm on Earth wanting to sound smarter than everyone else (admittedly, I am pointing the finger at myself a bit here as well).
So naturally, a question that nearly every client I have interacted with this week has asked me, tongue in cheek, is “So . . . have you been getting a lot of calls?”
To which I reply, “Should I be?”
An awkward pause usually happens here, as I grin sheepishly knowing what they’re really asking. They’re concerned, because they’ve read the news and they want to make sure that they aren’t missing something they should know. There’s a desire to feel secure, to feel confident, which is not necessarily the same as feeling scared or feeling defensive. But with all of the energy expelled by media in dispensing stress for entertainment and profit, that energy is either internalized, or we take it and make use of it. And if you don’t think financial advisers feel the same things you do when these situations occur, I’m here to pull back the curtain and reveal that yes, we financial advisers get nervous and concerned about these things too. I like to hit the treadmill when processing this sort of information – it puts energy into something useful, while giving me time to think about what is actually happening.
One of my favorite cringe-worthy phrases I hear when challenging situations arise in the market is the advice to “not get emotional.” Really? Don’t get emotional. There are people that are wired to flip the switch on, flip the switch off with their emotions and control that switch with the default set to “off” – they are psychopaths.
So, assuming that you are not a psychopath, when you see these headlines and facts being spilled out, you need a way to process that information and contextualize it without causing strong enough emotions that make you want to take immediate action. Daniel Kahneman, the 2002 Nobel prize winner in economics for his work in behavioral finance, describes our brains as having two systems. System 1 “is the brain’s fast, automatic, intuitive approach” where System 2 is “the mind’s slower, analytical mode, where reason dominates.” System 1 reacts to situations in the here and now; System 2 charts the future and looks for the most optimal route.
When we see headlines, coupled with alerts on our phone and flashing numbers on CNBC, all of these things are designed to trigger immediate actions from System 1 – watch the TV, read the article, click the button, pay attention to me NOW!” And when we do pay attention to it, System 1 continues to rock out instructions, so as it sees the numbers flashing on the screen, the big CAPS LOCKED (yeah, the CNBC app actually used caps lock in a number of its alerts this week – I got them all) System 1 wants to avoid danger, get out of the bad situation, mitigate damage. And so without any other plan or speed bump in place to slow action, I am certain some people jumped right onto their online brokerage accounts and sold things and bought things and pulled money out of things with the feeling of “phew, now I’m safe.”
And then System 2, slow as it is at times, catches up. It starts to process that nothing cataclysmic actually happened, apart from some numbers going down on a screen. If you had 100 shares of Apple and you didn’t sell them, you still have 100 shares of Apple. There’s still a roof over your head, your job is fine, food in the refrigerator, family and friends that love you, and you’re not injured or having your life threatened. The fact that the Dow swung 1,000 points in a day, or went on a 22,000 point ride this week, while they may be facts, did they actually matter?
For some people though, they never got to System 2. They listened to System 1, and fled to what they thought was safety. Except what they actually did, was bought high and sold low. And if they pulled money out of qualified retirement accounts, they potentially caused themselves years worth of damage in taxes and penalties. They ignored the plan they deliberately set up for themselves long-term, in favor of emotions and reactions that satisfied only the most immediate, short-term desires.
But Steven, they had a financial plan, so what was their fault? Their fault was not the lack of a plan involving their resources. Their fault was not having a plan involving their resources and their emotions.
I was an Eagle Scout, and throughout my time in Boy Scouts, our motto was to “Be Prepared.” It’s why you have an emergency kit in your vehicle, a fresh set of supplies and non-perishable goods in your home, so that in the event that something unexpected goes wrong, you have resources to handle it. Even my financial practice, Briggs Financial, has a disaster recovery plan should something unfortunate happen to my office or myself. The plan is not just to make sure we have resources – it is also to help us maintain a calm mindset so we can best react to the situation when and if it arises.
So, what is your financial emergency preparedness plan? How do you build one?
A great way to approach this (and how I like to work with my clients on this) is to talk about what some of the greatest risks are, say the top 5 risks, to the financial investments of your household. Then, once you’ve identified those risks, write out full-length answers on how exactly you will handle those situations. If a situation comes up that isn’t on this list, it did not make the cut, and it probably is not worth worrying about. Here are a few sample questions that come up often:
What happens if I (or my partner, or both of us) lose our job? How will we pay our expenses, and where will that money come from? Is that money in a safe place, or is it in a form that is subject to risk as well? Do we have a big enough emergency fund? (3-6 months of expenses, don’t skimp here folks!)
What happens if I (or my partner, or both of us) are injured or killed, or if our house is damaged or destroyed? Who will handle our finances and make sure things are taken care of if I am unable to do so? Are there liabilities, like a home mortgage or kids’ expenses/college, that need to be addressed if that situation occurs? If so, how are we going to address them?
What if the business I own has a bad year, or multiple bad years? If I need funding for the business, where will that come from?
If I am relying on my investments to pay for my living expenses, can I afford to have 10%, 15%, or 20% less money come in should the market go down? If not, how should I be invested to minimize the risk and avoid the associated losses from being market exposed?
Notice that in all of these questions, you don’t see me talking about headlines, or Dow points, or roller coasters. These questions are about facts that can actually happen in your life. These are the facts that matter. By having answers to questions like these, with an actionable plan that you can document and pull out and use if the situation ever arises, you can also discern when System 1 should kick in and you act by getting that plan out, or when System 1 wants to kicks in and react and you catch yourself, thinking “this situation isn’t on this list, let’s wait and give my mind a chance to catch-up.”
By building this framework for how you process information and react (or don’t react) to situations, you will make decisions that are better for you short and long-term without causing unnecessary expense getting tripped up on facts that just don’t matter.
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Finally, if you feel that working with a financial coach could help you stay on track in reaching your personal financial and investment goals, schedule a free consultation or email me at firstname.lastname@example.org – I would love to meet you!