Here is a great article on why it’s never a good idea to make any type of financial decision based on an emotional response. In counseling with college students and faculty regarding investment decisions and personal financial issues, too often I hear stories that demonstrate how fear can drive inappropriate and irrational decisions regarding money.
The most notable examples occur whenever we see a downturn in the stock market. As the market drifts lower, we call our investment adviser and voice our concern. She tells us not to panic, and that the market always has its ups and downs. Days later, and after further declines, we call again, and once again are told to stay the course. As the market drifts even lower in the coming weeks, eventually we can’t stand to watch our portfolio slowly slip away and, over our adviser’s objections, we take action, moving from stocks and mutual funds into the relative safety of savings accounts and money market funds.
Over time, the market rebounds and since we are never sure that the turnaround will continue, we wait and ask our adviser what to do. In addition to admonishing us that we should have not left the market in the first place, our adviser lets us know that she can’t forecast the future, but over our country’s history the market trend has clearly been upward. So eventually, as the market continues its upward climb, we act and jump back into the same investments we held months earlier.
What’s wrong with that picture? Hmmm… we just sold low and bought high!
There is a great book on the subject, Your Money & Your Brain by Jason Zweig. Why do we often do stupid things that are clearly not in our own best interest? Simple – we let our emotions get in the way of our common sense.
The message? Never let emotions drive financial decisions. Take a breath. Calm down. Think long term.