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Why Investment Diversification Matters
Diversification plays a key role in managing investment risk. Learn how balancing asset classes, sectors, and markets can help your portfolio...
Learn how emotional triggers like market volatility and life changes can impact financial decisions, and discover strategies to maintain perspective for better long-term outcomes.
How Emotions Impact Financial Decisions and How to Overcome Them
Financial decisions are rarely made in an emotional vacuum. Whether we realize it or not, our feelings and reactions to life circumstances often influence our financial choices - sometimes leading us down paths that aren't best for our long-term goals.
The good news is that recognizing emotional triggers and planning around them can help you stay grounded and objective when it comes to managing your wealth.
Common Emotional Triggers
Several situations consistently trigger emotional responses that can lead to suboptimal financial decisions.
- Major Life Changes - Retirement, marriage, divorce, or a career transition can create financial uncertainty that can cloud judgment.
- Sociopolitical Environment - When current events or political shifts clash with your personal values, it's easy to let that influence your view of the markets or economy.
- Health Challenges - Facing a serious diagnosis or ongoing medical concerns introduces vulnerability. Financial decisions made during these times often come from a place of fear or urgency.
- Investment Volatility - Market swings are perhaps the most universal trigger. When values drop, stress rises—and the impulse to pull out of investments can be strong. On the flip side, during periods of strong growth, overconfidence might drive unnecessarily risky behavior.
Strategies for Staying Grounded During Volatility
Rather than reacting emotionally in the moment, it’s helpful to rely on a planning structure that encourages deliberate thinking and supports long-term goals. Here are four strategies I often discuss with clients:
Revisit Your Financial Plan
Your plan exists for a reason—to guide decisions through both calm and turbulent times. Reassessing your financial roadmap during periods of stress can bring the focus back to what really matters: your long-term goals, values, and the steps you’ve already outlined to support them. A strong plan isn’t just for forecasting, it’s a tool for regaining clarity when emotions start to cloud your judgment.
Prepare for Life’s Curveballs with a Plan of Action
We can’t predict every event, but we can plan for how to respond. When clients have clearly defined contingency strategies—for market dips, healthcare events, job changes, or other disruptions—it creates a sense of direction even in uncertain moments. Knowing exactly which accounts will provide living expenses during market downturns or how specific goals will stay funded allows for more confident decision-making when challenges arise.
Take a Granular View
When emotions take over, it's easy to let broad fears influence narrow decisions. That’s why it helps to zoom in. Instead of making assumptions based on headlines or worst-case scenarios, we break decisions down into their real-world implications. How will this choice affect your retirement income in five years? What happens to your tax liability if you sell this investment today? This approach helps cut through anxiety and reveal the actual trade-offs involved.
Respect Your Personal Comfort Zone
Finding the balance between your financial strategy and personal comfort is crucial. Sometimes the technically "best" financial move doesn't align with a client's values or comfort level. For instance, some clients maintain larger cash reserves than theoretically necessary because it helps them sleep better at night. This "pillow test" represents an important consideration in financial planning.
Real-World Examples
I've seen many examples of financial decisions driven by emotions that were contrary to a client's best interests. Thankfully, sound planning can help shift the conversation.
Mortgage Payoff Pressure
During recent years, many clients secured mortgages with historically low interest rates. Despite having these cost-effective loans, some clients approaching retirement felt uncomfortable carrying debt and wanted to pay off their mortgages immediately.
While conventional wisdom often suggests eliminating debt before retirement, this generalized advice wasn't optimal for their specific situations. Through comprehensive financial planning, we could show how maintaining these low-interest mortgages while keeping funds invested or in high-yield cash accounts can potentially create better long-term outcomes.
Tax Strategy
Paying taxes rarely feels good, and most people instinctively try to minimize their current tax bill. However, situations exist where increasing this year's tax burden may lead to long-term tax savings. Without looking at multiple years and understanding the broader implications, emotionally driven decisions to minimize current taxes can potentially lead to higher lifetime tax burdens.
Political Reactions
Political cycles consistently trigger emotional financial reactions. After elections, we routinely see investors whose preferred candidate won become overly optimistic about market prospects, while those disappointed by election results often become unnecessarily pessimistic. The reality is that retirement typically spans multiple political administrations, requiring a long-term approach regardless of current political leadership.
EP Wealth’s Plan-First Philosophy
At EP Wealth, we operate with a "plan-first, investment-second" philosophy. Investment strategy should always be driven by a comprehensive financial plan aligned with personal values and priorities. This approach is intended to naturally help manage emotional reactions by anchoring decisions to long-term objectives.
Consider two clients with vastly different goals: one wants to spend down assets completely during their lifetime, while another aims to maximize inheritance for heirs. These contrasting objectives require entirely different optimal strategies. Without a clear plan, most investors default to simply maximizing account values - which might not align with their actual priorities.
By understanding your emotional triggers and implementing strategies to maintain perspective, you can make financial decisions that truly serve your long-term goals and values rather than momentary emotional needs.
Contact an advisor at EP Wealth to start the conversation.
DISCLOSURES:
- EP Wealth Advisors, LLC. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.
- Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings / checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
- Hiring a qualified advisor and/or financial planner does not guarantee investment success, and does not ensure that a client or prospective client will experience a higher level of performance or results. No guaranty or warranty is made that any direct or implied results or projections being represented here will be met or sustained.
- The need for a financial advisor or financial planner and/or the type of services required are specific to the uniqueness of each individual’s circumstances. There is no guarantee or warrantee that the services offered by EP Wealth Advisors, LLC will satisfy your specific financial services requirements. Services offered by other advisors may align more to your specific needs.
- Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice.
- EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented. All expressions of option are subject to change without notice.
