Have you ever heard of the phrase “The Behavior Gap?”
In today’s article, we’re diving into this interesting concept that explains why we react to market conditions the way that we do and how we can avoid leading with emotions when making financial decisions.
“It turns out my job was not to find great investments but to help create great investors,” writes Carl Richards, author of “The Behavior Gap.”
From increasing our budget mindfulness to taking a steadier approach to investing, Richards has drawn attention to how our unexamined behaviors and emotions can be to our detriment when it comes to living a happy and financially sound life.
In many cases, we make poor financial decisions when experiencing panic or anxiety due to personal or widespread events. 1
The Behavior Gap Explained
Coined by Richards, “the behavior gap” refers to the difference between a wise financial decision versus what we decide to do.
Many people miss out on higher returns because of emotionally driven decisions, creating a behavior gap between their lower returns and what they could have earned.
Excitement When Stocks Are High
Whether in a bull market or witnessing the hype from a product release, many investors may feel tempted to increase their risks or attempt to gain from emerging investments when stocks are high. This can lead to investors constantly readjusting their portfolios as the market experiences upswings.
Fear When Stocks Are Low
In response to market volatility, investors may feel the need to choose more secure investments and avoid uncertain or seemingly unsafe investments. When stocks are low, a typical response may be to sell and effectively miss out on potential long-term gains.
Related: What to Expect in a Bear Market
Short-Term Anxiety and Focus
As humans, viewing aspects of our lives through the lenses of current circumstances is normal. However, one emotional response to any event is letting the moment consume us.
Many may find it difficult to think long-term and remember. However, making a rash decision can inhibit the long-term benefit of maintaining a balanced perspective without reactionary behavior.
The market can go up or down at any given point, or it can remain the same.
The stock market itself has a natural life cycle that — like life itself — is destined to encounter peaks and valleys.
It’s important to remember that we have been in similar circumstances before; we will be there again; and in between, we will experience more periods of economic and investment prosperity.
Everyone here at Team WAG have been working on putting together a helpful resource to help guide you through the downs of the market.
In this guide, we’ll take a macro-look at what’s going on in the market and general guidelines for down market moves. You can download your What to do in a Down Market Guide by entering in your info below and we’ll send you a free copy.
One thing we can control is how we handle our financial strategy.
Remembering the likelihood of recovery over time — and the market’s nearly inevitable up-and-down movement — can provide a more logical angle to calm the nerves.
If you’re experiencing financial anxiety in response to the markets, take a breath and remember the potential for long-term gains.
If you feel you need to prepare more for the future or reexamine your existing retirement planning strategy, I’d love to set up some time to chat.
We’re happy to work with you either in person, over the phone, or virtually, based on your preference. Give our office a call and we can schedule some time together.
1. BehaviorGap.com, May 16, 2022