2020 may tempt people to throw out their long-term plans. Here's how advisors can keep them on track
- The prolonged stress of the coronavirus pandemic can impair long-term decision making.
- While today's situation may feel permanent, making moves based on current conditions can lead to regrets later.
- Here's why people tend to become either too conservative or too aggressive under duress, and how financial advisors are helping them combat their inertia.
It's no secret that 2020 has been an unpredictable year.
And that uncertainty can cloud the decisions we make, especially when it comes to money.
Consequently, investors and their financial advisors need to be on their guard for clouded decision making that could lead to regrets later.
"It's possible that the times have triggered a fundamental shift in your priorities," said Sarah Newcomb, director of behavioral science at Morningstar.
"But what we have to be careful about is temporary shifts in priorities that have to do with short-term thinking, either fear of loss or fear of missing out," she said.
Why 'short-termism' is our biggest enemy
The problem is that our brains are not wired to handle prolonged uncertainty, Newcomb said.
When there's certainty, there's less cognitive load required, she said. That means we can put our energy and attention on other things.
Less predictability, on the other hand, can wear us down over time because it is a stressor on our brains.
"One of the main threats to good financial management right now is the fact that this uncertainty has made short-term thinkers of most of us," Newcomb said. "It's very hard to invest for the long-term when you feel like the world's going to end next week."
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Long-term financial planning – whether it be paying off debt, investing in education or retirement savings – requires a long-term view.
When we can't imagine what the world will look like next month, planning for a 10-, 20- or 30-year time horizon may seem irrational, Newcomb said.
"We have to really just recognize that our brains are fighting back at this point and saying, 'Well, I don't know what's going to happen next week,'" Newcomb said.
Fear of loss vs. fear of missing out
Short-term thinking tends to lead to one of either two extremes: risk aversion or risk seeking.
Those who are risk-averse want some certainty out of all the unpredictability. And they get that by reducing how much they leave to chance when it comes to their money.
"We want something in our financial lives to be certain and so we are willing to risk the opportunity of growth," Newcomb said.
"People will pay a heavy financial price to pull out of the market just to make sure that they at least know what the number will be," she said.
One of the main threats to good financial management right now is the fact that this uncertainty has made short-term thinkers of most of us."Sarah NewcombDirector of behavioral science, Morningstar
Others instead become more risk-seeking and may become more willing to put their money into speculative investments.
"When the future doesn't seem real, you might as well roll the dice," Newcomb said of the mentality.
Those who embrace that thinking include the armchair day traders who believe they can predict the next big thing.
The key is to know which extreme you lean to, and try to strike a balance, Newcomb said.
Financial advisors can help clients by putting constraints and limits around the decisions they make, she said.
'This, too, will pass'
Jude Boudreaux, a certified financial planner and senior financial planner at The Planning Center in New Orleans, said he encourages clients to step back and have a long-term view when making financial decisions now.
Some clients have been forced to make choices, particularly with regard to retirement. Some people's plans have been accelerated because of buyouts. Others are deciding to work longer because they're less sure of what's to come.
As clients transition, Boudreaux said he typically poses the question to them, "What actions can we take now to help you feel more in control of the situation?" Some moves may need to happen soon, while other actions can be put off for three to 12 months or more, he said.
People may be inclined to make other big moves like buying a vacation home now to have a place to escape to amid the pandemic. But it might not be as attractive once they can travel again.
"Things may not always be this way, and you may want to go back to Europe again," Boudreaux said. "This, too, will pass."
Focus on what you know
Winnie Sun, managing director of Sun Group Wealth Partners in Irvine, California, said she's encouraging clients to focus on getting their budgets in shape and making plans based on what we do know.
That includes talking about the numbers, like how much aid was included in the CARES Act that Congress passed in the spring or how much the U.S. deficit has increased.
"The political news is what's probably more harmful to planning now than financial news," Sun said. "I'm actually encouraging people to read more financial news right now."
One future consequence we can predict from all the government spending now is that taxes will go up, she said.
Now, she's encouraging clients to put more money toward post-tax Roth 401(k) plans or individual retirement accounts, as well as doing Roth conversions now, before those higher levies hit.