Fall 2020 Quarterly Newsletter
Author: Sarah LePhew, CFP®
I do not think it is a coincidence that over the past couple of months three books have landed on my desk (or in my Kindle) sharing a common theme: the power of positivity. As I’ve been meeting with clients over the last six months, I’ve listened to their stories and shared their feelings of uncertainty, anxiousness and loneliness. It’s undeniable that the pandemic has caused hardships for many people and that as a nation we are going through a period of change.
In one of the books given to me by a new friend, “The Psychology of Money” by Morgan Housel, the author makes a point that was a bit of an “aha moment” for me. Pessimism is more “seductive” than optimism. This seems true, despite the fact that when we look back through our history we find more instances of perseverance, innovation and adaption than defeat. He also notes that sometimes successes happen over longer periods of time and that failures often happen quickly. In today’s world, the media enhances this as bad stories make the headlines and good stories are often left out.
So, it seems timely to provide a reminder of how impactful positive thinking can be and that in some ways it’s also connected to our financial well-being. Studies have been conducted for years about the neurological responses to positive thinking. In a nutshell, they have found that when we experience feelings of happiness our brain functioning is enhanced. We are more creative, we are capable of more complex problem-solving skills and the list goes on.
Conversely, when we are experiencing negative thoughts or feelings the science indicates that our brain’s responses are limited or narrowed (fight or flight). As advisors, we see that this holds true in relation to decisions you make about your money. During positive times, clients typically consider increasing their savings rate or increasing their equity exposure. When our personal experience in the world is negative, it at least crosses our minds to cut our losses and run to “safety.” (There are many reasons why this doesn’t work, but I digress!)
Why is this a completely natural reaction? Because it’s how we are wired! Housel does a phenomenal job of articulating the principle of strategic asset allocation. He calls this setting a “reasonable” plan and sticking to it rather than a “rational” one. The rational plan makes 100% mathematical sense, but leaves a very low probability that you’ll be able to stick to it in times of despair. The reasonable plan is the one that gives you the highest probability to stick with it.
In closing, I encourage you to be intentional in creating a plan with your advisor that you will stick with in addition to creating a personal environment that breeds positivity. It’s a winning combination.
This article was featured in our Fall 2020 Quarterly Newsletter available here:Quarterly Newsletter