All Things Financial Planning Blog

Part Four of my Four Fat Financial Fears!

We are in the fourth and final fear after tackling topics of volatility, outliving our income, and getting organized. It’s time for our last installment; making good decisions in our finances.  I’m sure you’ve heard the analogies like “paralysis by analysis” or “decision by denial.” Yet I feel the more prevalent type of decision these days is actually “execution by emotion.”  That’s all part of the whole brain thing that sucks when we all use left brain (very logical and calculating) and right brain (more emotional and creative) patterns to try and make good decisions.  I’m not pretending to be a psychologist here, even if I did marry one!  In fact my wife and I usually come to the same conclusion on most issues, although we go about it in very different fashions. I read an article or talk to someone whom I respect and I am usually ready to make a decision and in a very short period of time. My wife on the other hand will read a book on the situation, have a long discussion with me, or surf the net for hours to get information in order to make her feel more comfortable in making a final decision. If you’re single it becomes a little harder in terms of whom you bounce your ideas off of, but the final determination is that you should decide what’s right! In the case of a couple, I feel that there has to be a unanimous decision. If not then it becomes a divide and conquer situation, where one puts their money here and the other goes someplace else. Unfortunately that can end up having a winner and a loser, which has the potential to cause some harsh feelings in the future.

My personal bias is that many of the clients that I’ve worked and collaborated with over the last 30 years make their decisions based on logic, numbers and reasoning when things are going well. I believe the court reverses when times get tough, as we go back to our emotions and the basic human instinct of fight or flight.  You have to see the April 27 2010 Nova/ PBS show Mind over Money, which talks about how we make irrational decisions when it comes to money.  Harvard psychologist, Jennifer Lerner, Nova PBS money decisions talks about how our emotional states like fear, anger, or sadness affect our decisions. She talks about how taking more risk can actually lead to better decisions when people are angry. Even though I’ve read a lot of economics books over my career, I feel that some of the most relevant are about behavioral economics, which really got its roots when a psychologist, Daniel Kahneman, won a Nobel Prize in economics!

So here’s my checklist of five things that are important to make good money decisions:

1. Who is going to do it and what do they want?  The 2009 Spectrem Group study on the mass affluent showed that 39% of the people make their own financial decisions without the assistance of a financial advisor, 26% choose an advisor for a particular situation or event, 20% regularly consult with a financial advisor, and 15% are totally advisor dependent. If you are part of that 61% that may seek help, the top five items that were the most important were:  96% said properly responding to inquiries and questions, 91% said good credentials, designations and licenses, 79% said regularly outperforms the markets, 76% said offer products with a variety of different companies, and 72% said they want to work with the advisor because they had a long history of dealing with them.
2. Is it a big decision or a little decision?  Examples of big decisions are divorce, bankruptcy, taking a new job, buying a new house, choosing a new advisor, establishing an investment policy with specific investment guidelines, retiring, major health issues, caring for family members, major legal issues, or big-ticket purchases. Each one of these probably requires he/she have some type of expert to help you figure out the complexities. Time should be taken with all of these items because they can have a dramatic effect on your lifestyle. Don’t sweat the small stuff though. Struggling over whether to buy particular investments should take less effort, especially if they are less than 5% of your total net worth.  I like to follow the 10% solution, which says it if it’s less than 10% of your net worth and is liquid (you can sell within a day or two) than 10 business days or two weeks is enough time to make a decision.
3. The 1 to 10 rule!  Try and figure out how much impact this would have on her life on a scale of 1 to 10 and try and rate it accordingly with how long you can take to make decisions. Everybody moves at their own pace, whether sometimes it’s at lightning speed or sometimes at glacial. So figure out where you are on the scale. As an example if it takes you 3 to 6 months to make big decisions,  then use that  time for the 8’s, 9’s & 10’s. The flipside is to not spend more than a couple of days on the 1’s, 2’s or 3’s.  It seems when we have to make a lot of decisions we forget to prioritize.  So clear your mind of the clutter and get the little things out of the way first because they should take less time and effort. That will allow you to focus on me 8-10’s and even get help if you need with those important decisions.
4. What’s your motivation? I think the why questions of decisions are more important than the what questions. This gets back to the premise of what is your emotional state when you’re making big decisions. If you’re under stress, then it’s probably better to put it off. If you’re relaxed and feeling rational and calm, then decisions can be quicker and easier.
5. No decision is a decision! I remember back in my college days when I was taking a management concepts class called MBO (management by objectives,) one of the options was always to do nothing. Some of my best decisions have actually been to do nothing! I also find that it’s interesting that some of those no decision things come back to be much bigger decisions and warrant much further analysis.

So now I’ve finished giving you my four fat financial fears that I feel people face. I will remind you that when it comes to your financial fitness, I’ll bet just about every day there is some financial situation or decision that you will worry about.  All I ask is that you try and prioritize those fears and know when to ask for help from a peer or professional. We all need help at sometime whether it is about the facts or the feelings. Remember that asking for help is why every three-year-old gets what they want!

Dave Caruso, CFP®
Certified Financial Planner™
Coastal Capital Group
Danvers, MA