This is Part 3 of a series titled “Neuroscience: How Our Brains and Wired.” Part 1 described that the two major parts of the brain that are involved in financial decisions are the amygdala (which controls our emotions such as fear, greed, impulsive behavior, and cravings) and the prefrontal cortex (where rational thinking and logical behavior reside). Part 2 talked about how the amygdala and the prefrontal cortex may be in conflict with each other within our brains, and how we need to be aware when making financial decisions that the amygdala or the prefrontal cortex may be dominant.
Below is a list of 10 tips titled “A Balanced Approach”. These are designed for persons who tend to become fearful when the stock market starts to plummet, and who consider selling their investments impulsively due to fear. Using the tips in “A Balanced Approach” may prevent someone from making an impulsive (and unwise) financial decision, and to engage their prefrontal cortex to tap into rational thinking.
A Balanced Approach
1. Have a long-term financial plan that includes specific goals. Your plan will provide discipline when you are tempted to react emotionally to the gyrations of the stock market.
2. Review your goals often and stay focused.
3. Establish some investing guidelines. In the financial industry, we call this an Investment Policy Statement (IPS). In the simplest form, your IPS should state your investment objective—such as aggressive growth, long-term growth, balanced growth, conservative growth and income, or capital preservation and income. You may also want to include the asset allocation you have chosen for your investments. Chapter Ten of my book is devoted to investment topics, including asset allocation.
4. Set a limit for yourself, such as committing to wait at least one day before buying a financial product. Deciding you are going to “sleep on” a financial decision before taking any action may allow you to tap into your prefrontal cortex to gain logical, rational thinking about the decision.
5. Get a second opinion before buying a financial product.
6. Understand your loss tolerance. If your tolerance is low, keep your investments conservative so the losses in your accounts will be less than the overall stock market when it drops significantly.
7. Be aware that fear and greed are the worst enemies to your financial security.
8. Turn off the TV and the computer if the “noise” from a stock market correction gets too loud. Go for a walk, ride your bike, or play tourist for a day.
9. Remind yourself that you have a long-term plan that will serve you well. Statistics from the U.S. stock market have been collected since 1926. During those 86-plus years, there have been many frightening events, and the stock market has nosedived many times. But it has always recovered.
10. Stay in control of your finances (covered in Chapters 7-11 of my book). Prepare your net worth statement, manage your saving and spending, build three tax buckets, know your tolerance for risk, monitor your investment accounts, and don’t neglect your finances.
Photo by: Tax Credits
