By April Miller
Unless you understand why you make mistakes, odds are you’ll continue making them. And when those mistakes are financial, they will cost you.
“At times, even very smart people can act very irrationally and make very big mistakes with their money,” Les Szarka, the CEO, founder, and co-owner of Szarka Financial, says.
Most of the time, the subconscious portion of our brain — the one running on instinct — and the logical side are in harmony. But, Szarka says, when emotions such as fear or greed are running high, the impulsive side may take control.
Say the stock market is dropping and fear sets in. An investor may make a sudden decision to sell. Or the market begins to soar, so greed instinct kicks in to buy, buy, buy.
“We may look back at a poor decision we made and ask, ‘What in the world was I thinking?’ The reality,” Szarka says, “is that we may not have been thinking at all but rather acting on our subconscious impulses.”
These same emotions can play out on a larger scale, influencing the entire market to behave irrationally. “It can cause investors to behave in ‘herd’ mentality and at times lead markets to be grossly over-priced, which can then lead to substantial drops,” Szarka says.
Although women tend to be more patient investors and not afraid to seek advice, while men seek immediate results, Szarka says neither gender is free of sometimes falling victim to their emotions. “Getting a financial check-up or second opinion,” he adds, “can help to make sure you are on track with your financial goals, especially in the low-interest rate environment we are currently in.”
Taking a 24-hour timeout prior to making any major financial or investment decision allows your logical brain to offer input versus the impulsive side solely making the call.
“Once you understand the influence your subconscious has over your decisions,” Szarka says, “it loses much of its influence. It certainly doesn’t mean you won’t make any more mistakes, but at least you’ve given yourself a fighting chance to make more logical and thought-out decisions.”
It was Szarka’s interest in behavioral science that led him to write “Money Brain: How Your Subconscious Mind Can Hijack Your Investment Decisions.” As he researched the topic, he found most books were written by academics.
“So I decided to write a book that combined my extensive research on the topic, along with my first-hand experience as a financial advisor, having worked directly with investors for over 30 years,” he says.
Szarka is also trying to help his peers better understand the role the subconscious plays in financial decisions so they in turn can help clients. When it comes to creating a financial plan, he says there is no cookie-cutter approach. A customized plan must take into account age, career, hobbies, children, if you plan to pay for college education, if you are a business owner, short-term and long-term financial needs.
“There are so many factors that play into creating a true ‘financial plan’ for individuals,” he says.
For more information: szarkafinancial.com