Beware of Emotions Affecting Your Money Decisions
Wednesday, April 1st, 2020

Impulsive moves could breed tomorrow’s regrets.

When emotions and money intersect, the effects can be financially injurious. Emotions can cause us to overreact – or not act at all when we should. As we move through the current economic downturn, this is especially pertinent. In this article, we will discuss things to keep in mind as we navigate 2020’s unique financial turbulence.

What you need to know is that at Navalign, we are working diligently to support you through this tumultuous time. While COVID-19 is serious, this is not the end of the world. If you want to talk through your investments, debt payments, and other financial topics, please feel free to set up a meeting.

Acting fast might not be the best move

Think of the investors who always respond to sudden Wall Street volatility. Their emotional response may not be warranted and they may come to regret it.

In a typical market year, Wall Street will experience some amount of volatility. So far this year, with the amount of volatility we’ve already experienced, it will go down in the record books. After reaching its all time high a month prior, on March 23, 2020 the Dow Jones Industrial Average closed below 19,000 total points. This is the lowest it has been since February 2017. Since then major global stock indices have come off those lows considerably.

The global COVID-19 pandemic is definitely affecting the economy, and If history repeats itself, then acting quickly out of fear may not be the best move for investors. While plunging stock prices in March felt earthshaking to some, daily retreats of this magnitude have been seen before, will be seen again, and should be taken in stride.

Most people came away from the Financial Crisis, which lasted over a year-and-a-half, with a big hit to their accounts. It was all recovered in the following years as the market and global economy returned to a new normal. We expect COVID-19 to continue putting stress on the economy for the next several weeks. Then we will move forward, and possibly recover fully within a matter of months. Nobody really knows what the new normal will look like in this recovery, but most people agree that humanity will ultimately prevail.

Fear and anxiety can also cause stubbornness

Some people have looked at money one way all their lives. Others have had more malleable perspectives that change throughout their lives. When someone who has only one view of money is affected by something that happens outside of their frame of reference, they may feel fear or panic. In the face of such an event, they may refuse to change or admit that their opinion may be wrong. To lose faith in their entrenched point of view would make them feel uneasy or lost. So, they doggedly cling to that point of view and do things the same way as they always have, even though it no longer makes any sense for their financial present or future. In this case, emotion is simply overriding logic.

While it is important to be rooted in your beliefs, the market is constantly changing. Additionally, people’s plans change over time as well. Therefore, it is important to make educated decisions that react to both the market and a person’s values accordingly.

What about those who treat revolving debt nonchalantly?

Some people treat a credit card purchase like a cash purchase – or worse yet, they adopt a psychology in which buying something with a credit card feels like they are “getting it for free.” A kind of euphoria can set in: they have that dining room set or a cool new ATV in their possession now; they can deal with paying it off tomorrow. This blissful ignorance (or dismissal) of the real cost of borrowing can dig a household deeper and deeper into debt, to the point where drawing down savings may be the only way to wipe it out.

As we move through the time of COVID-19, many people are losing their incomes. This may be temporary or permanent, and many are unsure of when they will regain their income. Not only that, but it can feel burdensome to take on debt now that the future looks so unsure. If you feel that you need to take on credit card debt right now, do so judiciously. You will have to pay back your debts in the future. If you are unsure of whether to dip into your investments or take on debt to cover your current expenses, we can help you have a conversation to decide what the best move is for you.

How about those who put off important financial decisions?

Postponing a retirement or estate planning decision does not always reflect caution or contemplation. Sometimes, it reflects a lack of knowledge or confidence. Worry and fear are the emotions clouding the picture. What clears things up? What makes these decisions easier? Communication with financial professionals. When the investor or saver recognizes a lack of understanding, shares his or her need to know with a financial professional, and asks for assistance, certainty can replace ambiguity.

Emotions can keep people from doing the right things with their money – or lead them to keep doing the wrong things. As you save, invest, and plan for your future, try to let logic rule. Years from now, you may be thankful you did.