Beware of Making Emotional Decisions About Your Personal Finances

The more pessimistic you are about the state of the economy, the greater the odds that it isaffecting your financial decisions—and not necessarily in a good way.It is the conclusion of a new national survey from financial services firm Edward Jones andMorning Consult. Inflation is on top of the list of people’s concerns. However, it is just one thingamong the 83 percent of U.S. adults surveyed who cited it—oreven the 41 percent who saidthey’d considered it in their decision-making process in the past nine months. And quite anotherto get so worked up about the inflation rate’s steady rise (or other issues like the employmentrate and supply chain disruptions,for that matter) that you wind up doing something rash.According to the survey, one out of five Americans admits to primarily making emotionaldecisions when it comes to their finances. The figure is even higher for Gen Z investors, withmore than onein three of those aged 18 to 25 saying the same. And that is where the potentialdanger lies.”When people become worried about their finances, their natural desire is to do something oranything to make that worry go away,” said Laurel Newman, a behavioral scientist at EdwardJones. “But it is important not to let fear, anxiety, or excitement over the stock market deraillong-term goals. “The financial crisis of 2008 proved how costly acting on raw emotion can be.From the market top on October 9, 2007,through the bear market bottom on March 9, 2009, theS&P 500 index and the Dow Jones Industrial Average both lost more than half their value. Butinvestors who stuck it out—as opposed to panic-selling everything and eating what wouldotherwise only havebeen paper losses—saw the S&P rally 331 percent from that low throughits all-time high on August 29, 2018.That works out to a compound annual growth rate of 16 to 17 percent. The bright spot in thesurvey was that, despite the ongoing economic uncertainty brought on by the COVID pandemic,79 percent of respondents still managed to have made carefully planned financial decisionsover the same nine-month period as their “emotional” counterparts. Many credited theirlevelheadedness to working with a financial advisor.

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