The Decision Process
It's your choice
TL;DR - Between market stimuli and our financial responses lies a space where thoughtful decision-making can lead to better long-term financial outcomes.
"Between stimulus and response, there is a space. In that space lies our freedom and power to choose our response. In our response lies our growth and our happiness." This line is credited to Stephen Covey, of 7 Habits of Highly Effective People fame, but it is also attributed to Viktor Frankl decades earlier in his book, Man's Search for Meaning. I highly recommend this book for your reading list.
What the heck does this have to do with personal finance? Everything!
If you remember, I end every post with the following:
Ultimately, you are the only one responsible for your financial decisions; take that responsibility seriously at all stages of your financial journey.Many stimuli impact our day-to-day and long-term financial decisions. Slow down and use the space between stimulus and response to help make the best decision.
I participate in a couple of message boards on personal finance and am amazed at the financial situations some folks find themselves in. If you are in a dilemma, I encourage you to follow some basic ABCDEs to help work through the response to a stimulus.
Accept: You are where you are. Without a time machine, you can't change what got you here. So, stop focusing on past actions and focus on the decision at hand.
Breathe: You have many options, even if you don't see them. In this step, you must breathe and take a census of your emotional or reflexive responses. While first impressions may appear promising, unconscious biases can significantly distort your evaluation process. I learned these by reading Thinking, Fast and Slow by Daniel Kahneman and The Psychology of Money by Morgan Housel. Create distance—take a walk, sleep on it, temper your excitement, or sip cool water—anything that slows your decision-making process.
Conceive: Review the options and the expected outcomes.
If you only see one option, you might need some help. Ask a trusted friend or family member, or conduct internet searches to gather ideas for your process. (Notice I said, ideas. Do not use message boards or Google searches to decide; use them as additional information only.) Be sure to use reliable sources. Depending on the complexity of the decision, it is essential to consult experts, such as financial advisers, accountants, and lawyers, as needed.
All decisions have outcomes; your goal is to know the possible outcomes to understand risks and opportunities.
Decide: To decide, from the Latin "decidere," which means "to cut off". You cut away your other options and go with the one. No regrets.
Evaluate: Reflect on the outcome. Was it the right choice, or were you completely off? What did you do well, and what can be improved for the next decision? This step is very important to the learning process.
Consider this example:
Stimulus
March and April 2025 - The market has been swinging wildly from day to day, and in the near term, it doesn't appear that the volatility will level out anytime soon. I am concerned that the market could decline, potentially jeopardizing my retirement and investment accounts. I heard people discussing withdrawing money to keep it safe.
Response
Acceptance
Yes, the market is volatile; I can't do anything about that volatility. However, if it scares me, I may be too aggressive with my allocation and might need to move towards some safety. I have an investment plan prepared in better times, with 90% allocated to equities and approximately 10% to cash and income investments.
Breathe
Nothing is changing overnight. I just saw a headline about a recession. I need to move quickly, but making a rushed decision doesn't give me enough time to review the options and their outcomes. I give myself a few days to review and breathe.
What worries me is that I see my accounts hemorrhaging money. I may be invested too aggressively, but we did make this plan with an advisor, and I understand the market outlook is positive over the long term. I have enough cash and safe investments to cover me for a year before tapping into my retirement. Most market downturns last less than 18 months.
Conceive - Looking across my options, I see about 10. Here are my top three:
Option 1: Do nothing. We have seen markets like this before. If I do nothing and ride it out, every one of the last four downturns (2001, 2008, 2020, 2022) has resulted in a better long-term outcome. We have the safer portion of our account that we can use to pull from in the short term while things recover.
Option 2: Lower risk in my portfolio by selling equities to purchase bonds or holding in cash. I would lock in my near-term losses, but if I look at my returns for the past year, I'm still up nicely, so I'm not losing much. I will also need to consider the tax impacts of selling or rebalancing.
Option 3: Cash out completely and get back in later. I would lock in my near-term losses, but if I look at my returns for the past year, I am still up nicely, so I'm not losing much. Then, I need to figure out how/when I get back in. This didn't work out for me in 2008, so from my experience, I feel safer just letting it ride.
Outcomes
If the market continues to go down:
Option 1 - Keep riding it out, use safe money to cover expenses.
Option 2 - Rebalance my portfolio.
Option 3 - Sell now. Wait and buy back in when I see the bottom.
If the market goes back up
Option 1 - Don’t have to worry about timing the market.
Option 2- Locked in my losses.
Option 3 - Locked in my losses and have to buy in higher.
If the market goes sideways
Option 1 - No worries, just sitting, waiting.
Option 2- Not worried as I am safe.
Option 3 - No benefit unless I start playing the market.
Decide: Based on the options and outcomes, I have decided to do nothing, which has been my investment strategy since 2008.
Evaluate: To evaluate over the next year, I will review my portfolio each quarter with my financial advisor and then adapt my decisions based on new information.
Ultimately, you are the only one responsible for your financial decisions; take that responsibility seriously at all stages of your financial journey.