Financial Survey: 1 in 5 Americans Make Financial Decisions Around Emotion — Why That’s Bad, and How To Stop

Worries parents doing home finances in the living room.
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The uncertain state of the COVID-era U.S. economy and recent volatility in the stock markets make it more important than ever to make rational and informed financial decisions, yet more than one-fifth of Americans are still driven by emotion when it comes to personal finances, according to a new study from Edward Jones and Morning Consult.

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The study, released on Tuesday and based on a January survey of 2,200 adults, found that Americans are fairly evenly split on the current state of the U.S. economy. While 45% are optimistic about where it is headed, nearly as many are pessimistic (42%). Top concerns include inflation (83%), supply chain disruptions (77%), the employment rate (71%) and interest rates (71%).

The vast majority of respondents have made carefully planned financial decisions over the past nine months, the study found. Yet, about one in five (21%) admit to primarily making emotional decisions about personal finance. The figure is even higher for Gen Z respondents (37%).

Emotion is especially prevalent when it comes to investments, said Mona Mahajan, senior investment strategist at Edward Jones.

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“When the media highlights the latest ‘high-performing’ investment or notes a ‘dramatic’ decline in the markets, investors may be tempted to give in to their natural emotional reactions — like greed or fear,” she told GOBankingRates in an email. “But an emotional response to markets can lead to buying at peaks and selling at bottoms — a recipe for underperformance. Our study found that the more concerned adults are with economic conditions, the larger the impact their concerns have on their financial decisions.”

COVID-19 and inflation have played a significant role in driving decisions about financial strategies, Mahajan said. This has led to more fear and anxiety — as well as more excitement — all of which can put too much focus on the short term.

“Emotional investing can lead to poor decisions that impact long-term financial goals,” she added.

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What should you do to avoid letting emotion dictate your financial decisions? Mahajan recommends maintaining your focus on long-term goals, staying well diversified in terms of assets and investments and reviewing your strategies and objectives regularly.

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“This can help drive portfolio stability as well as build confidence in personal financial knowledge, and importantly, can help Americans stay on track to meet their long-term financial goals,” she said.

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Mahajan also recommends consulting with a financial advisor if you can afford it.

“We found that trusted financial advisors can play a key role in building financial knowledge and confidence — two important pieces of building financial resilience,” she said. “Often, investors make changes to their portfolios that do not result in better performance just to satisfy the need to take action. Financial advisors can better help guide investors, removing emotional responses from the equation.”

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About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal and Business North Carolina magazine. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting earned awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A native of North Carolina who also writes fiction, Vance’s short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. Two of his short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. His debut novel, Voodoo Hideaway, was published in 2021 by Atmosphere Press.
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