Financial Decisions: Emotions vs. Logic

Money is an emotional topic.  Whether we are saving money or spending money, we usually make those decisions based on how it makes us feel rather than formulating decisions based on logic.  However, emotions are probably what motivate us to save to begin with.  Feeling the need to save for a house, retirement, or even college education is emotional because it is tied to a desire to be comfortable.  When investing to reach your goals, volatility in the stock market can appear to threaten your plans.  Some people believe that when their investments have dropped, it is time to sell because they don’t want any more downside.  This is an emotional decision, and one that comes with consequences.  The problem with getting out at a time when stocks have depreciated is that you have to know when to get back in.  Without a crystal ball, you run the risk of selling your stocks at lows and buying back in at highs.

As advisors, we can remove the emotion from making financial decisions with our clients.  Taking away the emotional piece and making decisions based on math and logic helps our clients “stay the course” and remain on track within their financial plan.  This doesn’t mean that emotions shouldn’t come into play when making important decisions, but it does mean listening to our clients and gaining a full understanding of the situation so, together, we can make a logic-based decision.  There are always going to be news headlines which can provoke emotional responses.  When a topic or headline plays to the fear and panic emotions, all attention is on the headline…rather than a plan.  Focusing on facts and not feelings can help prevent the knee-jerk reaction to panic. 

Having a written financial plan that is regularly updated and reviewed can assist in financial decision making.  It gives our clients confidence, even during times of market volatility.  I often discuss this exact concept when meeting with clients.  I explain that the output of the written plan is based solely on math.  When we are “stress testing” certain variables, like retirement age, the math doesn’t lie.  However, it is up to human behavior to maintain the input of the plan.  Making logic-based decisions around spending and savings rates can keep you on course to achieve your goals.

All investing involves risk including loss of principal. No strategy ensures success or protects against loss.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Advisor Alliance, a registered investment advisor. Independent Advisor Alliance and Marzano Capital Group are separate entities from LPL Financial


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