Market Response, Impulse, Emergency Money and Bad Investing

Mistakes in the recession

Responses to the market collapse, investing impulsively, emergency money, and bad investing make up the top regrets of the recession. Consumers are weighing in on how well they fared throughout the recession on each one and learning lessons from their responses. Now that the recession is considered to be over, it’s a good time for everyone to reflect on what not to do in times of financial strain.

Responding to the market collapse

A lot of consumers panicked when they heard that the recession was coming. According to Dan Ariely, a Duke University behavioral economist, “Emotions can cause consumers to act quickly in times of stress. Many people sold stocks during the recession… their immediate reaction was to ‘get out.’ It’s understandable, but there are better ways to manage.” Ariely says that he purposely avoided checking the Dow’s plunge to stop himself from impulse-fueled activities. Many experts suggest that watching the market like a hawk in times of financial strain only creates panic. It’s a better idea to set up safeguards, such as automatic emails if a stock falls below a certain level, but other than that, consistently obsessing over investments is pointless. It only creates more stress and that can cause impulse reactions.

Investing impulsively should be discouraged

Paul Zak, director for the Center for Neuro-economics Studies at Claremont Graduate University, said, “The human brain’s ‘wanting system’ is triggered when an investment increases in value and that pushes consumers to buy more.” In the same way, when an investment decreases, the brain wants to sell. This behavior was prevalent in the recession and millions of consumers were led by their immediate assessment of the market. A good financial advisor can encourage an investor to stay solid with decisions, rather than sway with the market unwisely. Some financial advisers will help consumers stay on track by putting decision-making in writing. Kenneth Robinson, financial planner in Cleveland, Ohio, said that his clients sign a written asset allocation plan and then his job is to keep them committed to it. He said, “It helps clients commit to and stick to diversifying their investments.”

Emergency money funds were missing in the recession

Another lesson consumers learned from the recession was that emergency cash was crucial to survival. It is natural to become lax with saving when money is coming in at a good pace, but consumers learned that that pace can change quickly. With the unemployment rate soaring, consumers had to use what reserves they did have to sustain every day bills. To prevent a shortfall in cash, many advisors suggest using the auto-deposit option most banks offer. Putting a lump sum into the account on a monthly basis can effortlessly bolster emergency funds.

Not understanding a loan’s fine print

Not understanding a loan’s fine print is bad investing. A lot of homeowners didn’t understand what the terms and conditions of their mortgage loans were. Ariely said, “Figuring out how to borrow is complex and too many consumers are lured into complacency when they hear ‘you can always refinance in the future’ or ‘if you move you won’t have to worry.’” The way to mitigate risk here is to read the fine print. The government is helping with this one because it is requiring lending companies to provide one-page outlines of a loan that detail any risky features.

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