How to avoid knee-jerk reactions to negative financial events
Market volatility is a normal part of investing. But that doesn’t stop people from getting nervous during a market dip. What’s important is that you know how to prevent that initial wave of negativity from leading you to rash decisions that could cause far greater damage to your nest egg than a market correction would.
Introducing the ABCDE method…
Dr. Martin Seay is a specialist in positive psychology, which focuses on strategies that people can use to improve their sense of well-being. Dr. Seay’s ABCDE method can help you work through your reactions to distressing financial news and arrive at a positive outcome.
Let’s walk through an example of how to use this method to avoid making a bad, emotion-based financial decision.
A. Activating Event
Sometimes stress and anxiety can feel all-encompassing. Dr. Seay believes it’s important that we pinpoint the event that triggered our negative feelings.
While you might feel general anxiety about your finances, drill down a little deeper. Is your job secure? OK. Are you saving and investing according to your financial plan? Good.
Did you just read on social media that today’s market correction was “THE BIGGEST ONE-DAY DROP IN HISTORY!” – There’s your activating event.
Let’s move on to the next step.
Market volatility can rouse some of our worst instincts about investing. We might fall back on long-buried beliefs such as, “This game is rigged!” We might feel like we’ve entrusted our financial future to powers beyond our control.
As you work through this step, it’s important to ask yourself where your beliefs come from. Have you been unsettled by widespread media coverage of major financial problems, like the 2008-2009 housing crisis? Have you had negative interactions with the finance industry in the past? Perhaps one of your parents distrusted the markets or made a poor investment that had a negative impact on your family.
Figuring out why you believe what you believe about the markets can help alert you before you fall back into bad financial habits.
Panicked investors who can’t shake negative beliefs about the markets often make poor decisions during downturns. They think they need to “get out fast” to avoid more negative consequences, like further losses.
Ironically, cashing out your investments during a market correction usually leads to far more serious consequences in the long run.
So how can you stay focused on the big picture?
Start by using what you know to push back a little against what you believe.
For example, we’ve discussed in our meetings that the historical, long-term trajectory of the financial markets has been to rise over time. However, when the market does have a temporary drop, you might find that the headlines read “MARKET PLUMMETS IN JUST ONE DAY”, when really they should read “Market shifts in the usual, random way”.
We’ve also discussed that “market timing” strategies usually just don’t work. That’s why your portfolio is diversified, balanced, and strategically rebalanced as necessary. Decades of market history have shown that sticking to this type of investment strategy may be more effective – and stable – than trying to jump in and out of the market based on what’s happening in the news right now.
Today’s losses may only be a temporary blip, or even a correction in the long-term picture of creating wealth for tomorrow.
It’s amazing how just reminding ourselves of what we know to be true can make us feel better about a negative situation. Hopefully, at the end of this process, you will feel a renewed sense of positivity about this present moment and your financial future.
We understand that market volatility can be complicated.. However, whilst it’s “the downs that do the damage”, diversification helps to protect you from the worst of it.
So there you have it.
If you need help walking through your ABCDEs the next time the market corrects, contact us. We’ll run through the important facts you need to know and decide what moves, if any, we need to make to keep you on track with your financial plan.