5 tips to help you avoid financial ruin during this tumultuous time

We are afraid of the coronavirus pandemic. Our health is being threatened. Our loved ones are in danger. Our livelihoods are in jeopardy. Our investments are in free-fall. We are being told to socially isolate. We have no idea when this will end.

It is all quite terrifying.

When we perceive a threat, our brain floods our bloodstream with hormones such as adrenaline, which gets us ready to protect ourselves. While this works great when we are being chased by a predator, our survival response can wreak havoc on our financial lives. Our animal instincts are the primary reason we engage in self-destructive financial behaviors. When we are emotionally flooded, we become rationally challenged. When we are scared about the economy or our finances (or excited for that matter), our animal brain takes over and we are vulnerable to financial self-destruction.

So what can you do when you are terrified about your finances? Here are 5 tips to help you engage in rational financial decisions.

Tip No. 1: Put time between your impulse and your action.

Financial decisions made when we are emotionally flooded are almost always ill-advised. It is essential to calm down and get your rational brain back online. A great way to do this is to find a quiet place and take a few deep breaths. When we are stressed, we take shorter, shallower breaths. Taking several deep breaths can initiate a relaxation response. As you exhale, repeat in your mind a comforting word or phrase, such as “relax” or “take it easy.”

When we are upset it takes about 20 minutes of calming thoughts to allow the rational brain to take control again. Even then, we can still be swayed by our emotions, so consider seeking financial advice from an objective professional before making any big financial moves.

Tip No. 2: Avoid catastrophic thinking.

“The markets may never recover.” “I’m going to lose all my money.” “This time it’s different.” If you have had any of these thoughts pop into your mind, you are not alone. In fact, do you remember the terror you felt back in 2000 and 2008? Chances are, you had some or all these thoughts back then, too. Did you act on them? Did doing so help you or hurt you? We have these thoughts every time we experience a market crash. Just because it pops into your mind doesn’t mean it’s true.

Tip no. 3: Harness the power of mental accounting. 

When we see that the market is down 10% it can be terrifying. But most investors do not have 100% of their money invested in the Dow Jones Industrial Average (DJIA) or the S&P 500, which are common market indicators. However, the red charts and downward arrows on the news may not be a direct reflection of what is happening in your portfolio. We have a natural tendency to put things into mental buckets. Sometimes this tendency hurts us, such as when we carelessly spend a bonus check or tax refund in a way we would never spend our paycheck.

However, we can harness this tendency to our benefit. Take a moment to look at the asset allocation in your portfolio. For example, you may notice that you have 50% in stocks and 50% in bonds or cash. In this scenario your stock portion may be down 10%, but the other parts of your portfolio may be down much less or not at all.

Tip No. 4: Expand your frame of reference.

We have experienced a fast and dramatic drop in the markets, and it feels like our portfolios have fallen off a cliff. In fact, if you look at a three-month chart of the Dow Jones Industrial Average, that’s exactly what it looks like. However, prudent investors are in it for the long haul. Short-term market fluctuations may have much less of an impact on your financial health than you think.

If you are a long-term investor, don’t focus on a narrow frame of reference. Look at the Dow’s historic trends. For example, look at how the DJIA performed over the past 3, 5 and 10 years. Just for fun, look at the 100-year DJIA chart. What do you see? When you expand your frame of reference, you will see that what is happening looks much more like a pothole than a cliff. If you are a long-term investor, a short-term mindset is not only unhelpful, it may be irrelevant.

Tip No. 5: Try the worst-case scenario exercise.

The alarm is real for many, many people, and experts say it is going to get even worse before it gets better. This is horrible news. We are worried about our future. Many of us may not be able to pay our bills. Our brains interpret these events as life-threatening, and they may be for some.

While for most people these events are not life-threatening, stress can be. This exercise helps you arrive at that conclusion. It is a form of exposure therapy, and it can be quite helpful. Take some time to think through the worst-case scenario. For example, if you lost your job, what would happen? If you couldn’t pay your rent, what would happen next? If you had to move in with your parents or a friend, then what would happen? For this exercise, keep going down the chain of worst possible outcomes. What is the worst thing that can happen if your fears proved true? Could you live with that? What is the most likely thing that will happen?

Often at the end of this exercise, you realize that while there will be disruption, stress and discomfort, it is not life-threatening and eventually you will get back on your feet. For some people there may even be a silver lining in the worst-case scenario, such as being closer to family.

This is an incredibly stressful time for many of us. When we are stressed, we are vulnerable to making bad financial decisions. Whether the market is screaming up or plummeting downward, whatever you do, don’t let your animal brain take control of your financial life.