As humans, we’re wired to respond to feelings of danger. While this is vital in life and death situations, it’s not as helpful when we are trying to make rational financial decisions.
Research has shown that when we make decisions in times of stress, changes in our brain chemistry impact our ability to make sound decisions. It’s important to understand why this is happening and how to address in order to keep our financial goals on track.
What’s happening in our brain: Research by Jason Zweig in his book “Your Money & Your Brain” showed that while financial anxiety is not a physical threat, our brain may actually respond to it in the same manner. A tissue in our brain called the amygdala produces such a strong emotional response it blocks our rational prefrontal cortex from helping us make sound decisions. Other research has shown that when we’re stressed our perspective narrows and we tend to make decisions based on whatever information is readily available (and not necessarily helpful).
Consequences: There are real financial consequences for letting our emotions take over during the decision making process. There are countless stories of the 2008 financial crisis when investors cashed out their stock investments at the bottom of the market, locking in losses and missing one of the longest bull markets in history. On the flip side, we have probably all heard of someone who felt they were “missing out” on a hot investment, only to buy it at its peak price.
Tuning out the noise: An important component to avoid making rash decisions is understanding the underlying triggers of financial anxiety. In a world where news, stock quotes, and investment account balances are available 24/7, it’s easy to get information overload. While we may feel that we need to remain hyper-vigilant about checking our financial accounts and the news, it’s probably better to take a more disciplined approach to consuming this information. If constantly checking your 401(k) stresses you out, experts recommend maintaining a fixed schedule, checking your investment account balances weekly, monthly or even quarterly.
Take comfort in your long-term financial plan: In times of high anxiety, it’s important to realize why you have a long-term financial plan and a financial advisor. Your financial plan is based on your long-term financial objectives and should be structured to withstand periods of market stress. Now is a great time to reach out to your financial advisor for reassurance and guidance. If changes do need to be made to your financial plan, your financial professional can recommend suitable options.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. This material was prepared by LPL Financial. Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL Financial affiliate, please note LPL Financial makes no representation with respect to such entity.
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