There is no shortage of investment advice this day and age. The abundance of information has made it difficult for investors and every day working professionals to choose the best path towards financial freedom. Do you buy real estate? Do you buy stocks? Should you use a roboadvisor or pay 1% to a financial professional? Crypto, marijuana investments, index funds, mutual funds, angel investing — all investment opportunities competing for your hard-earned dollars! The reality is, none of these specific investment ideas are as important as ONE major concept, your behavior. Why do I need Behavioral Financial Advice? Humans are naturally emotional. Throw in the daily stimuli of work, kids, family, advertisements, social media, social pressures, and competition – a sensory overload! The limbic system is comprised of various brain structures that are located above the brain stem and is highly involved with our emotions, feelings of pleasure, and memories. The amygdala, specifically, is involved with the processing of these emotions, memories, and motivation. Life events occur daily that cause happiness, stress, fear, anger, or confusion. Historically, when relating to finances and investments, this is the worst time to make quick decisions. Reacting on impulse or gut instincts have proven to harm all our planning and sacrifice. Let’s use an example here.
You have had a secure job with a six-figure income for many years. You have a budget, an emergency account with 6 months of living expenses, a 401k that you max out every year, and a brokerage account with extra investments you contributed to every month through a dollar-cost average strategy. On October 10th of 2018, your company was acquired, and you were let go. This same day, you watched your market portfolio (S&P500 because it is cheap and you read to buy this for no fees) drop by over 3%, so $3000 for every $100,000 invested. The next day, it dropped another 2%. Academic research and evidence of individual investor performance suggest you were very likely to ditch your investments or some of your funds. In this emotional moment, you were wanting to protect from further risk in your portfolio, even though you knew this money was for long term goals that you had outlined in your plan. Maybe you were mentally tougher than the average Joe, and you made it through until December, only to sell out before the holidays after the market declined another 13.8%. Your initial $100,000 is now $81,180 on paper as of December 26th, 2018. After losing your job and having to spend money through the holidays, it is probable you sold your investment. For my visual people, see below. As of July 20th, 2019, for those of you working with a trusted advisor, who helps manage your behavior along with your goals and objectives, this investment is worth $106,850 or 6.85% higher than that October 10th, 2018. Even smart people make emotional mistakes. Don’t do this alone. Find someone you can trust to help guide you and save you from making very costly decisions. Stay tuned for more behavioral advice or follow @lifemanaged_.