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What you don’t know can hurt you; Fear of the unknown is the #1 issue in people’s lives December 17, 2014

Posted by shaferfinancial in Finance.

As regular readers know, my background is in social psychology. Applying what I understand on how our minds’ work to financial matters lead me to several different strategies which include using equity indexed universal life policies to help fund retirement income.

The other day I received this e-mail note from a client:

I wanted to send you word that since I rearrange my retirement plan over the past two years, I am now riding out this stock market crash with little panic. I have moved most of my money into a combination of real estate, discounted real estate notes, and an EIUL.

I feel like I understand the risks at play, and how people all around me must be panicking like crazy due to this giant drop in oil prices. I feel like I can see the systemic risk you have been preaching about for years, for which mutual funds were supposed to be our savior. And yet, look at them now!

Thanks for helping me build REAL net worth.

This client has constructed a financial profile that allows him to sleep well at night.
This is perhaps the best financial advice I can give: Construct your personal financial situation in such a way as to allow you to sleep well at night. There are no guarantees in this world. But there is one thing I have discovered over the years; we are our worst enemies. Let me explain. Our brains are hardwired to take action in the face of perceived danger. When that saber tooth tiger entered our cave, the survivors were the ones that ran or used weapons to fight. Those that quietly, serenely, surveyed the situation were eaten. Fight or flight or freeze? The reaction to extreme stress creates real physiological changes. Transfer this known psychological reaction and its encouragement of action to our current financial world. The data is clear that people react to the ups and downs of the stock market in similar ways that are not good for their accounts. They buy high and sell low. What should they do? Nothing. Back in pre-history doing nothing gets you eaten. In the financial world doing nothing has proven to be the only way to do well over the long run.

How hard is it? Really hard. While I watch my energy stocks go down, my entire being was screaming sell….sell….sell. I went back and re-read Warren Bufffet to settle me down. But as I tell my clients when they ask, can you sleep at night when your portfolio of stocks [or mutual funds] goes in free-fall? Because if there are any doubts, then you don’t need to be in the equities market. The ability to resist your brain is very difficult and takes a certain personality.

Now, the above client might not have a set of financial strategies that work for you. But, you need to find strategies that work for your situation and personality. Nothing less will end up in disaster as the current data on personal wealth indicate for the vast majority.

Does an EIUL work for you? Maybe? Real Estate? Mutual Funds? Stocks? Bonds? Discounted Notes?
Figure it out, because your financial life depends on it.

Have a Merry Christmas and Happy New Year!



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