Ignore the ‘caveman’: making solid financial decisions

Fight-orf-light instinct might make you feel like getting out of the market or making radical changes

Tens of thousands of years ago, when cavemen roamed the earth, life was not kind to those who were slow to act. Response time could be the difference between bringing home a meal or becoming a meal. Fortunately, our brains are wired to react quickly in order to survive. Danger signals reach the emotional and habit areas of our brain before they reach the area where we rationalize. The timing difference between reacting and thinking is measured in milliseconds but, if you’re a caveman making life or death choices, those milliseconds might save your life.

Evolution has served us well in regard to surviving life in the wild. But how do we handle all the signals in our modern world? Let’s say, for example, you turn on the evening news and the first thing you see is a picture of some trader on the floor of the stock exchange, with a little tear streaming down his face. That image reaches your emotional center first.

The same thing happens when a friend shares an article warning that the world is about to burn down, or when you open your 401(k) statement amid the heightened volatility this year. Fight-orflight instinct might make you feel like getting out of the market or making radical changes. This is a problem relating not only to investment decisions, it also applies to financial, business and even personal decisions. We sense “danger,” and we want to react.

In the absence of information, all we have to rely on is how things make us feel. You see the bad news and you call your advisor, she tells you not to worry because you’re saving for the long term. If you haven’t laid the proper groundwork of financial planning, that answer is less likely to make you feel better.

Here are some thoughts on how you might move decision-making away from the emotional and towards the rational in your financial decision-making:

• Think about the things that mean the most to you and set goals that fit. Setting a goal that doesn’t match your values increases the odds of setting a goal that won’t match your behavior. Money matters, but it is a tool we can use to bring meaning to our life, it should not be THE meaning of life. If you’ve set a goal based on clearly identified values, it will be easier to focus on the goalposts no matter how hard the wind is blowing.

• Have a plan. Not just a random idea of what you want, but a clear outline of your objectives where you’ve looked at the tools you have to work with and decided how you’re going to use those tools. What specific actions are you going to take that will help you reach your targets? When it comes to financial assets, think about “when and where.” Knowing these things will help you live peacefully with your decisions.

The simplest example of “when” is money that you won’t need for 10 years. You can probably ride out a bear market and maybe even invest additional dollars that have time to grow.

Contemplating “where” can be a lengthy discussion, but it includes taking things like taxes and costs into account.

• Review your plan. Is it still appropriate in one year, two years, 10?

What’s working? What’s not working? Stick to your plan but don’t be inflexible. Make changes to your goals when they don’t match your needs or values, and make changes to your strategies when they are no longer viable.

• Ask questions. If there’s one thing you can find easily these days, it’s information. Remember, fear sells a lot of newspapers. Take care to work with a financial advisor who takes time to educate and inform you. Questions are a powerful tool.

Use these techniques to make financial and personal decisions. When the emotional response center of your brain wants to lead you to fear-based decisions, you have the power to reassign the work to the rational part of your brain and make decisions that are in line with your goals and your values.

Steven Bissonnette is a financial advisor with Rise Private Wealth Management, a private wealth advisory practice of Ameriprise Financial Services, in Bedford.