Financial matters cause stress to almost everyone. Some have a healthy anxiety around money matters that helps them make smart financial decisions, while for others that stress can lead to bad financial choices.
If investors really want to safeguard or drive gains with those financial portfolios, it's key to pay attention to how stress caused by everyday life affects our financial decision-making. Few of us are immune to chronic stress. In fact, according to the Global Organization of Stress, 75 percent of the U.S. adult population is living with it. This condition of chronic stress, or what I call "stress brain," is the culprit for not only mental and physical illness, but also for poor judgment when it comes to financial decision-making.
In the realm of financial investment, a level of stress is commonplace.
Successful investors know how to thrive "under the gun." There is a very fine line between success and failure, however, when it comes to operating under the influence of stress. Periodic stress, or that which comes and goes, leaves room between experiences to decompress. The brain can then respond to the next round of stressful decision-making episodes with even more effective thought process that yields a strategic level of risk-taking with investments.
However, when we have to contend with consistent stress in and outside of work, the break the brain needs to restore itself is eliminated. Stress brain becomes the norm. The benefits of the situational, periodic stress of financial decision-making are lost to the chronic stress condition. In fact, with chronic stress, the brain goes into a type of "airplane mode" to conserve and protect itself.
Stress brain is typically caused by this accumulation of stress from a high-pressured job combined with strain from other parts of life, such as family demands, health concerns and/or ongoing social challenges. With higher levels of cortisol maintained over long periods of time, stress brain takes a toll on cognitive functioning.
On the most basic level, we think and act at a much slower pace. Given the timeliness of some of the best financial investments, this delay in pulling the trigger therefore can result in missed opportunities. Stress brain, however, can cause greater long-term detriment to the mental sharpness for the investor as it thwarts creative thinking, diminishes memory function and detracts from ability to focus.
Ironically, chronic stress doesn't detract from wise financial decision-making just because it slows you down mentally and inhibits innovative strategic thinking. It also distorts the perception of potential outcomes as the brain tries to "feel better."