The Pressure of Making the Right Financial Decisions

by Benjamin Beck, CFP® Benjamin Beck, CFP® | December 16, 2022

Let's talk about the pressure that some folks put on themselves when it comes to decision making. One could say this about many areas of life, but for now we’ll limit it to the context of finance. 

This year it's been the pressure of a bear market. What we have experienced isn’t anything out of the ordinary, as historically speaking, we go through bear markets once every five years. And those bear markets typically represent a decline of roughly a third of your portfolio fairly frequently but also very temporarily. In the context of a lifelong investment journey the drops don’t last long, though it doesn't feel that way when you're inside of one. You have a bad month in the market, and it feels like an eternity. 


The Impact of Inflation on Investors

When it comes to the money that you're putting away, (we have talked about this in other blogs), when you’re younger, and you’re working, and you're accumulating money and your money is going straight from a paycheck into your 401k, or you’re building up money in your checking or your savings account – it’s common to not pay too much attention to your savings account. Chances are life is busy, and you’re on some sort of automatic program. Many of the folks that we consult with as clients tell us they don’t pay a lot of attention to their 401k. They've hired us, of course, so maybe they’re a little bit different because now they have a financial advisor. But compared to people who are in their late fifties, or early to mid-sixties, the bear markets and volatility don’t seem to bother the younger investor quite as much. 

The logic for the younger investor is “I’m working.” Yes, they are still earning money. They’ve decided to save X percent of their income for their future. Granted, their investments are going up and down, but they are working, have a surplus of capital, and are living their life. 


Emotions Get in the Way of Making Good Financial Decisions

But then this same person goes through a transition of retiring, or perhaps they already are retired, and now the main source of incoming funds is a job that's been paying out over the years but is represented by an account that holds years and years of the money that they have worked so hard to accumulate. Then we go through a year like 2022, and an incredible change in mentality and emotion transpires. This same person, who could shrug off a bear market, who could say, “Oh, that’s just market volatility!” is gripped with anxiety. It’s a 180-degree turn from where they were just a decade ago. 

Of course, it’s human. Because for most people, when they begin their investing journey, they begin with a smaller amount of money.  It grows incrementally, but with life, family, and work in the background, it’s easy to get distracted and not pay attention. But once the money starts to grow, perhaps the rules change in their minds. Now the accounts represent a bigger number, so the number takes on a different significance. Not to mention that people get older, and they don’t necessarily want to work for the rest of their lives. 

It's human to experience anxiety. The anxiety is real, and that is the ONLY thing that is different between where they are today and where they were a decade ago. The markets themselves have not changed one bit from what they were before. They are just being themselves, going up and down, going through their cycles. It’s the human that has changed over time. It’s normal to become more concerned about one's long-term security as one ages. Completely normal.


Protecting Your Investments Into The  Future

So what do you say to someone who is at the retirement age of 62, presumably with another 30 years or so of life ahead of them? Knowing that their anxiety is both real and normal when it comes to their shrinking focus on their finances. By shrinking focus, I mean that while in the past they may not have labored over their financial decisions as much (or at all!) now every decision feels like it bears so much weight. Now, it’s so incredibly difficult to make decisions about money.

Most people don’t imagine themselves at age 90 or beyond. Longevity is not something people like to think about, and yet we are living longer than ever. The first thing to acknowledge is that most of us will live a long, long time. And as the cost of living continues to increase every year, outliving one’s assets becomes a huge concern. 2022 was a year when inflation and rising prices are conspicuous in the news. It's something that's being talked about at length with regard to what the Federal Reserve is doing to combat it by raising interest rates. Yet regardless of the bigger inflation numbers that we're seeing reported and feel right now when we go to the grocery store or fill up our cars with gas or buy a product online, aside from some of the sticker shock we may experience, the threat of inflation is always present. It has always been present. It’s just that 2022 seems to be the first time in years that people have felt it again. (Many have heard of it for the first time in their lives.)


How to Avoid Outliving Your Retirement Savings

When we look at the past 30 years, inflation itself has not been immaterial, but the reporting of inflation has. This doesn’t mean that inflation hasn’t been present, it’s just not been the topic of headline news. And given that it’s been present, it creates a problem for the investor, right? If there is anywhere where an investor needs to put their focus it’s on this point: the rising cost of living, and how to keep up with it in one’s portfolio. But what do people do? 

They get distracted by the news, and all the things that are happening in the outside world start feeding their anxiety. They feel that this period that we’re living in is just so different that anything we have ever experienced. This, of course, gets in the way of their decision-making. They forget they will live for another thirty years. They forget that inflation has always been here. They forget that they will outlive their assets if they don’t address inflation systematically. They forget that they have a choice, a choice to stay invested in the markets so that they can reach their lifelong goals.

When people say, “the market's so terrible right now…the economy is in a place where we are seeing things that we haven’t seen in a long time... how should that impact my decision-making?” Our job as financial advisors is to remind them that none of this is new, and the only way it should impact their decision-making is to remind them that staying invested is the way to success. Everything – wars, economic disruptions, bear markets, and recessions, all these things have happened before. Despite all of it, the equity markets alone (not real estate, not bonds, not crypto, not alts, or anything else for that matter) have produced the kind of returns one would need to combat the rising cost of everything long-term. 

We can’t tell people that their anxiety is not real, because it is real. What we can do is focus their attention on where it needs to be: on their goals. We can get them to see that the things outside of their control – the state of the market, the state of the world – are outside their control. They always have been, and they always will be. 

This brings us back to where we started, namely the pressure people put on themselves to make the right decision about their finances. If we accept the fact that statistically, we will live much longer than we think we will and outlive our assets unless we are invested in strategies specifically designed to outpace inflation, and that what is going on in the world outside has no impact on how we conduct ourselves, then is there really any decision to be made, other than to remain invested in the most expedient way possible to achieve our financial plan? 

The only thing new in the world is the history we do not know. – Harry Truman

Dancing with the Analysts

Ben Beck is Managing Partner & Chief Investment Officer at Beck Bode, a deliberately different wealth management firm with a unique view on investing, business and life.

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