Don’t Make Snap Financial Decisions


If you are in charge of your own investments or if you are on the lookout for new financial opportunities and enjoy following along with the national or global financial markets, then you are likely to experience many occasions where a snap decision seems necessary.

No matter how fast a stock can double or take a dive, there is wisdom in the old adage “Slow and steady wins the race.”

If you are feeling driven by emotion or pressured to make an instant decision that could have a big impact on your financial future, take a step back to assess the situation and give yourself time to revisit the decision carefully, once the pressure has receded.

“There are no absolutes. You might panic or be under pressure and still make the smart choice with your money,” states U.S. News & World Report contributor Geoff Williams. “But certainly when your heart is racing and your palms are sweaty, you should sleep on a financial decision for a few nights, if you can.”

Even if you are feeling completely calm, giving yourself time to carefully consider all financial decisions is still a good habit to establish. In addition to preventing your emotions from clouding your judgment, waiting to make a big financial decision allows you to seek out an environment conducive to good decisions. Despite how commonplace mobile banking has become, that may mean putting down your smartphone to talk things over with your financial institution or to simply sit down at your desk to analyze your choices.

No matter how fast a stock can double or take a dive, there is wisdom in the old adage “Slow and steady wins the race.”“I recently conducted a pilot study with John Payne of Duke University…,” states Shlomo Benartzi in an article for the New York Times. “We found that people did significantly worse on a test of financial literacy – we asked them questions about such things as inflation and interest rates – when they took the test on a smartphone, at least when compared with those who used pen and paper.”

Mobile banking allows an astonishing array of transactions to happen quickly, both big and small. In order to conduct your finances carefully, you should avoid making big transactions on your phone, unless you have already had ample time to think about the decision first and are simply completing the technical aspects of the process on your phone.

“[S]elling stocks on a phone when markets sneeze might temporarily ease our panic, but is it good for our financial future?” asks Benartzi. “This research has led me to avoid making any major financial decisions on my smartphone, whether it’s rebalancing my 401(k) account or making an offer on a house.”

When you are contemplating an important financial decision, make sure that your emotions aren’t getting in the way, put away that smartphone and sleep on the decision for a few days. If you are unsure of how many days to wait, consider the advice of Kiplinger’s Investing for Income editor Jeffrey R. Kosnett, who also writes the Cash in Hand column for Kiplinger’s Personal Finance. He recommends abiding by a three-day rule, which he calls his “personal iron law of investing.”

“Simply put, in any news-driven market crisis, wait until the third business day after the news breaks to trade anything – bonds, stocks, funds, gold, anything,” states Kosnett. “Meditate. Breathe. Savor fine wine. Just don’t obsess.”

That can be difficult to do if you feel that there is an impending financial crisis, but find comfort in past history that has established the general wisdom of eschewing snap decisions.

“Never mind how much shareholder value the TV shouting heads say just got ‘destroyed,’” states Kosnett. “The selling waves are almost always fleeting, as plenty of previous seismic events – Chinese growth scares, Federal Reserve credit tightening, U.S. debt-ceiling brinkmanship, terrorist atrocities – underscore.”

He states that losses typically last for 72 hours, which doesn’t include weekends and holidays, so a three-day rule is a great timeline. Furthermore, if you run into many occasions where you must resist the urge to make a snap decision and invoke the three-day rule, it might be a good idea to reassess your investments to determine if you would feel more comfortable with less risky investments or by leaving your investments to the professionals at your financial institution.

 

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