Investors—however smart, seasoned or wealthy—are only human. Faced with dramatic market fluctuations like those seen over the last few days, many otherwise even-tempered investors might be tempted to act rashly—and irrationally.
Certified financial planner Geri Eisenman Pell, CEO of Pell Wealth Partners, notes that the study of behavioral finance—how and why people make the financial decisions they do—has taught today's financial planners to talk to investor clients to examine the rationale behind their decisions and to guide them in the right direction. This is extremely important in turbulent financial times.
People will often want to hold on to a certain investment for emotional reasons: for example, they've had it for years, they worked at that particular corporation or they inherited the stock from a loved one. "A good question to ask is: 'If you had cash today, would you buy that stock?'" Pell said. "And all of a sudden the person will say, 'Probably not.'"
Although we're all raised with inherited attitudes toward money—whether it's greed or fear, optimism or pessimism— "you have to get a lot of that out of the way and make sure that you're approaching with a more rational and grounded approach," Pell explained.
"The advice that I would give people is to really be careful, to make sure that you're not letting your own personal emotional behavioral bias get in the way," she said.