Money & $tress Don’t Mix
Posted on May 29, 2014 by bob in MoneyWise
One of the keys to a successful and satisfying life is the quality of the decisions one makes. Unfortunately, a long series of good choices can be undone by a single destructive decision. For example, the media seems to provide daily examples of people who spent a lifetime building up a sterling reputation, only to squander their good name in an instant when they were a blockhead.
While this principle holds true across every realm of life, my specific concern in this column is the impact of financial decisions. I want to look at a particular decision-making risk that can unravel a long series of sound choices: extreme stress or duress.
Everyone deals with stress on a daily basis, but extreme spikes usually result from less frequent causes. The effects are usually compounded by the fact that we have less experience handling them. Possible triggers include the loss of a meaningful relationship (death of a family member, divorce), especially when sudden or unexpected; the loss of a job; the loss of a home or other significant asset (fire, tornado, flood, burglary, stock market decline).
Research has shown that significant stress affects the way the brain functions for a period of time after the trigger event takes place. The duration of the effect depends in part on:
— the magnitude of the event,
— the degree to which it is a surprise, and
— the individual’s resources for coping, including prior experience.
A person under such unusual duress tends not to think as clearly, rationally and thoroughly as he/she would under more normal conditions. The consequence is that decisions made in this disturbed state are much more likely to be flawed than they would be if the choice were postponed until the decision maker is in a more normal and capable mental (emotional) state.
One application of this reality is that many competent advisors encourage new widows unaccustomed to handling finances not to make major financial decisions soon after the death of a husband. There have been many cases where survivors derived little long-term benefit from life insurance because of ill-advised choices made soon after a spouse’s death. Research also documents the fact that those who have experienced large investment reverses tend to make more extreme and poorly reasoned investment decisions for some time afterward.
Years ago my pastor had a poster in his study quoting theologian Harvey Cox. The poster said: “Not to decide is to decide.” Many Americans justly deride indecision. For people of action accustomed to making prompt choices, postponing a decision may feel wrong or out of character.
Yet sometimes the most prudent course of action is to wait and see, perhaps while gathering more information and giving your rational capabilities time to recover from an emotional shock. There is undoubtedly such a thing as postponing a decision too long, but rushing to judgment can be equally damaging.
When one is under duress and decisions are unavoidable, two good options exist.
First, follow a rehearsed or pre-established protocol, if one exists. This is like a pilot in an emergency using a checklist. The second is to rely on the counsel of a capable person who is less engaged emotionally and who will not benefit from the decision.
In part, wisdom consists of being able to recognize when one is capable of making a sound choice and when it is better to wait for more data or a clearer head.
Alan Wallace
Alan Wallace, CFA, ChFC, CLU is a Senior Financial Advisor for Ronald Blue & Co.’s Montgomery office, www.ronblue.com/location-al. He can be reached at 334-270-5960, or by e-mail at alan.wallace@ronblue.com.
