With almost everyone, there has been one overarching theme since March 2020. There is no need to mention what it is; you know it.
With so much unknown about what is and isn’t true, it is natural due to our fight or flight response to choose to be cautious, avoid the stress, and retreat. That has never been my bag. When dealing with the stress and disruption of the last year, my choice was to find and take in information. I sought to find multiple sources—some trusted, some distrusted, and others I’d never heard of before—to read whole articles rather than just headlines, and to weigh all of it to make a decision about the best way to move forward. Finally, I chose to always allow myself to take in more information. While I, like everyone else, am subject to my own biases, the only way to fight that is to keep seeking out more accurate information.
Last month, it came to my home. After all the research I had done and information I had gathered, I KNEW what the facts were: 99.7% of people in my age bracket will not die from the disease, that only 1-5% of all patients require hospitalization, and that those that are obese (and have other co-morbidities) have the worst outcomes. While due to my weight I technically was right on the border of obese by clinical standards, my doctor, who I had recently seen, suggested that all was okay, and according to him, I was healthy. Twenty-four hours later, I was literally making myself sick with worry as a member of my household became ill. When my turn came to be sick, I felt fine. I had a fever, but other than that was feeling just about normal. Yet, the worry of getting ill or having a bad outcome was worse than the disease itself, even though I knew the facts and had done the research.
But as I have demonstrated from my own experience, when there is a deep-seated fear placed in you, rationality can go out the window. Fear can be a great motivator—to freeze and do nothing. And when you freeze, it pays to have a professional who will guide you through the issues, whatever they might be, with rationality and experience to get you moving in the right direction. In my case, my doctor was terrific in helping me manage the feelings I couldn’t control while managing my symptoms, too. With money, worry can freeze you as well. My experience with COVID reminds me of several things which I always keep in mind when dealing with money, whether it is my clients’ or my own:
1. The Media Can Be Your Enemy
According to a working paper from the National Bureau of Economic Research (NBER), 91% of COVID coverage in this country was negative. (1) That much negativity can have an impact on our psyches and, in this country, anyway, we tend to seek out bad news. On the financial side, the financial media has an interest in getting you emotional, whether that be fearful or euphoric. If you are emotional, you might take an action that could be harmful to your finances, particularly if you are acting out of fear. And most of the people on TV get paid if you do take an action, even if it’s just watching the channel.
If you knew, as I do, that over long periods of time you were likely to make money by following a strategy and maintaining it consistently over a period of years and decades, would you pay attention to the fear in the news or spend time worrying what might happen in the next few weeks or months? And if you could have someone who would validate your feelings, but then give you the facts about your situation, would that be helpful to you?
2. We Overestimate Bad Outcomes
A Franklin Templeton-Gallup study showed that Americans wildly overestimated, by about a factor of 10, the likelihood that a person with COVID will need hospitalization. (2) As stated above, 1-5% of patients require hospitalization. But according to the study, about 60% of people believed that hospitalization rates were more than 20% and about one-third believed that more than half of all patients end up in the hospital! While some of this may have something to do with all the bad news that has bombarded us over the last 15 months, some of it also has to do with our numeracy, or ability to work with numbers. Those with low numeracy tended to overstate the actual number by a much larger factor than those with better numerical skills.
While this may say something about the state of education, it is also indicative of our need to receive accurate information so that we can make good decisions. While any year’s returns can vary greatly, the long-term return on the S&P 500 index is about 10% per year. (3) Over time, this can help build significant wealth, but quite often, the amygdala in our brain (which controls the fear response) focuses on the risk and what can go wrong rather than more likely outcomes.
That is not to say that risk management has no role in all this. One of my primary roles as a financial planner is as a risk manager. I help clients manage their risk all the time in several different ways. I help clients figure out the right portfolio by understanding how much risk they are willing to take on. I recently had a conversation with clients trying to understand their retirement plans so we can understand the risk that they will run out of money in retirement and see how managing budgets, expenses, and retirement dates affect that risk. And I recommend different insurance strategies to help clients mitigate the effects of unlikely but potentially catastrophic events.
3. Informing Yourself IS the Answer
Whether it is about health or money, your preconceived notions about the world may be wrong. Gathering, analyzing, and utilizing information is key. But beware that some information you get may be wrong, biased, or self-interested. Questioning the information you get will help you figure out the right answer for your situation.
And if you ask someone to help you understand the information you gather, make sure they’re working in your best interests. Make sure you understand their thought process regarding how and why they have come to their recommendations. Ask them what else they have considered or what might make them change their mind. And ask yourself those questions too. Make sure it is a true partnership.
When you are well informed, you can act in the world with comfort and confidence. Having confidence while maintaining an open mind to new information will put you in the best mindset to navigate the uncertainties that will always lie ahead.
Here’s a video follow-up to my blog post above.
It’s Time to Start Playing Offense
As the Covid crisis wanes and we head into summer, it’s time to stop playing defense and start playing offense.
Sources:
1. https://www.nber.org/system/files/working_papers/w28110/w28110.pdf
2. https://www.brookings.edu/research/how-misinformation-is-distorting-covid-policies-and-behaviors/
3. https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp
Russell D. Rivera, CFA, CFP® is the Founder and President of Voice Wealth Management (Voice) in New York, NY. He also likes to think of himself as a Personal CFO and Financial “Therapist” for entrepreneurs, young professionals, and their families. He helps clients make prudent financial decisions regarding spending, saving, investing, and planning while giving a voice to the individual client's financial priorities and experiences.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.