Financial Stress and Investing Don’t Mix

The Situation

According to a recent study done by the American Psychological Association, one of the leading causes of stress for Americans is financial instability. Nearly 80% of those surveyed said that financial problems were the leading cause of their stress (Jones 2009). Financial stress is being felt as a result of our current economic situation that has forced many Americans to deal with the loss of a job or home, a shift in spending habits, or maybe even an entire lifestyle change. The economic turmoil has brought to the surface many concerns about financial security and even one’s ability to retire when originally planned. These types of financial stress have been shown to affect people’s confidence in their ability to make an informed decision about personal finances and investments. A person’s propensity to save money, create a budget, and control impulses is due largely to their perceived level of control over their financial future as well as their knowledge about financial management. How people feel about their finances is directly linked to how they feel about their lives.

The Problem

In a nutshell, financial stress reduces an investor’s confidence, decision making abilities, and their perceived level of control (McCallen 2009). To be a successful investor in the long run, one needs to be focused and trade without emotion or distractions. Trading should be based off of logic (cost vs. benefit) rather than emotion or stress. Trading based off of emotion and stress can lead one to making irrational decisions and trading with a sense of urgency. In the end, that sense of urgency can make investing decisions reactive as opposed to proactive.

The Solution

Knowledge is power. A lack of knowledge couple with financial stress can lead to some very poor decisions in your portfolio. Failure to properly manage finances can have long-term consequences on your investment portfolio. Educating yourself on the proper ways to manage your finances is the key to reducing your financial stress. With education, people can change their expectations and their behaviors that are currently leading them down the wrong path. Investors who are knowledgeable about finances are more likely to behave in a responsible way with their money (Taylor and Overby 1999). Financial stability will help give you back the confidence and sense of control over your financial future. In addition, you will be able to make sound investing decisions with a clear point of view.

References:

Jones, Dan. “Meeting your financial goals.” Paraplegia News 63.7 (2009): 24+. Academic OneFile. Web. 27 May 2010.

McCallen, Joan. “Saving for tomorrow lowers stress today.” Public Management 91.3 (2009): 5. Academic OneFile. Web. 27 May 2010.

Taylor, D.S. and Gail Overby. 1999. Financial Practices and Expectations of Students and Non-Student Consumers. Journal of Family and Consumer Sciences, 91 (4): 39-42.