Radio host and author Dave Ramsey says people can react in unnecessarily negative ways to short-term financial losses.
He attributes this to the human tendency to be more dramatic than is warranted when faced with some difficult circumstances.
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In fact, Ramsay goes so far as to call this impulse a “drama queen” Mel.
A man, who identified himself as Jesse, recently asked a question about his personal finances.
“Dear Dave,” he wrote, according to KTAR News in Phoenix. “I’m 61 and hope to be able to retire soon, but I’m watching my retirement savings completely erode by the day. The only place I don’t lose money is the $180,000 I make in the bank almost zero interest. What should I do ?
Ramsay responded, seemingly unimpressed by the advice seeker’s perception of his financial reality.
“come on man.” Completely eroding day by day? “That’s a little dramatic,” Ramsey wrote. “One of the things you have to understand, and it has helped me understand since I started doing research on things like this 30 years ago, is that we all have a drama queen living in our brain who exaggerates things — especially when it comes to It’s an investment. So, take a deep breath and calm down. Everything will be fine. “
Ramsey gets into the psychology of how money losses affect people more than wins.
“Studies have shown that it takes $3 of investment gain to emotionally compensate for a $1 loss,” he wrote. “Our brains register negative things at a much greater rate than they do positive things, and it takes a lot of emotion to recover from that.
“Your investment might go down a little bit,” Ramsey continued. “If you had $1 million in there, it could be worth $900,000 right now. Next year, it could potentially rebound to $1.1 million. In other words, your entire retirement savings aren’t ‘eroding’.”
Ramsay closed his advice to Jesse with three questions and brief statements on each. All three have to do with the difference between the things people say or believe about their investments and the actual reality of the stock market.
Have you ever heard people say they lost all their money in the stock market? Well, that’s mathematically impossible, unless you put all your money into one company, and that company was completely closed and had zero value.
Remember Enron? What most people really mean when they say they lost a bunch of money because they freaked out and went into overdrama mode, then withdrew all their money during a market downturn.
Jesse, did you know that in the past 20 years, every year in the stock market has been followed by two years of record gains? Facts and math are your two best friends when it comes to telling your inner drama queen, “Shut up, we’re going to keep investing!”
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