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Investing

Higher rates, lower logic

In the heat of the moment, when the pressure is on, and we don’t have – or take – the time to reflect, we revert to our instinctive, fight-or-flight, highly-biased thinking fast. What does that mean in a high interest-rate environment?


“Thinking, Fast and Slow,” by Daniel Kahneman, is the foundational book in behavioral science – the study of how emotion and psychology impact decision-making. When we are relaxed, imagining the future, considering hypotheticals, we think slow, rational, idealistic. But in the heat of the moment, when the pressure is on, and we don’t have -- or take -- the time to reflect, we revert to our instinctive, fight-or-flight, highly-biased thinking fast. We react impulsively, with emotion and passion, instead of acting intentionally, with logic and reason. These fast decisions often undermine the long-term goals we set during times of thinking slow.

This a great lesson for all of us – clients and financial professionals – in this rising interest rates environment:

When rates rise fast, let’s make decisions slow. 

The Fed recently began raising interest rates for the first time in a long time and is expected to continue doing so for the foreseeable future.

As a result, many of us are feeling pressure to Act Now!, like refinance or buy a home before interests rates rise. To lock in lower rates, to invest in the U.S. dollar, to make big financial decisions in advance of future changes. 

The economic air is filled with urgency, anticipation, uncertainty and pressure. This impacts our financial decision-making. Making choices under pressure is when we’re most likely to think (too) fast.

It’s like when we shop for airline tickets and the website says, “Only two seats left at this price!” or “Five minutes left of this sale!” or “Hurry hurry, yes, you, these items are limited, and these prices won’t last!” Urgency and scarcity makes us think fast and act impulsively.

It may be that refinancing or making strategic investments are the right thing to do. But we want to make sure we choose those things based upon rational thinking, long term planning and acting in service of our financial goals… not just based upon feelings. We want to take advantage of our resources and advice to act upon knowledge, planning and expertise. We want to be certain we’re doing the right thing. We want to think slow.

So, given the relentless coverage of economic changes – rising rates, inflation, market volatility, energy and supply chain issues – how do we get our mind right to embrace the opportunities in front of us? Behavioral finance offers some good ideas.

Ask yourself why

When you find yourself thinking, “Interest rates are rising, I should do X,” take just a moment to ask yourself,  “Why?” Why do you want to do that? What purpose does it serve? How would it support your long-term and short-term financial goals? Is it in line with your wealth strategy?

Sure, a mortgage for a house now is probably cheaper than it will be in a year… but if buying a house isn’t part of your plan, than that doesn’t even matter. While that might seem logical to us, reading this in a cool, rational thinking-slow state of mind, you’d be surprised how often people get hooked by the prospect of a “great deal” and lose sight of whether it’s a necessary purchase at all We don’t need to hurry to buy something, “Before It’s Too Late!!!” if we don’t need to buy it at all.

Maybe a decision spurred by rising rates does support your financial plans. Great! Wonderful! Congrats! Pausing to asking ourselves why has served to reconnect us to our goals-based strategy and provides a framework to ensure we’re making the best decision for now and the future. There are, indeed, many opportunities provided by rising rates. It’s our job as financial advisors – and your job as financial decision makers – to ensure that we pursue these opportunities in line with the well thought out, big-picture, long-term plan that has provided these opportunities in the first place. A 10-second pause to reflect can create a 10-year runway to profit.

Distance yourself from yourself

Have you ever noticed that we treat other people better than we treat ourselves? That we are kinder, more likely to forgive, more reasonable when thinking of what someone else has done than what we have done ourselves? That we give other people better advice than we give ourselves?  This is natural – we’re most emotionally connected to our own decisions, so we’re most irrational about them – and, fortunately, it’s something we can flip and use to our advantage.

When making a decision with potentially large consequences – whether spurred by rising rates, sudden wealth or any number of catalysts – take a moment and ask yourself, “What advice would I give a good friend if she were in this same situation?” Imagine a trusted companion came to you and said, “Rates are rising, I’m concerned about X, so I think I’ll do Y.” What would you say to her? Chances are you’d give her good advice – you’ve been working with JPMorgan long enough to pick up a few things ;) – and, chances are, that advice is something you should give to yourself. 

A similar technique would be to ask yourself, “What will me in 10 years think about this move?” Again, this adds distance – in time – and separates us from the pressure and speed of the current moment, to make choices that benefit us long-term.  While these exercises might seem a little “silly,” research has shown these acts of “distancing” help people slow down and make better decisions.

Normalize this abnormal

This economic uncertainty and change does feel uncomfortable. While we can provide plenty of data to show that, historically, we’ve been through these moments and come out fine on the other side, the truth is that most of us haven’t felt this environment in a long time, if ever. And we all feel it; it’s normal. We are ready for it, and your advisors will help make sure you come out fine on the other side, but it would be dishonest to deny that there is a feeling of concern, uncertainty and apprehension. There is. That’s okay.

It’s not just the rising rates that weigh on us. There’s a cumulative stress we’ve all been building up the last few years. COVID-19, the economic swings of 2020-2021, political and cultural challenges, inflation, war, the inability to keep up with the latest TikTok dances… there’s a lot going on. Rising rates are just the latest “thing to deal with,” and it all adds up. We might be “just” your financial advisors, but we believe your money is meant to work for you and your life. So take care of yourself, take a break, take some deep breaths, and we and your money will be here to serve you when you’re ready.

Finally, rising rates might seem like another time we’ve lost control. Someone else has set the conditions for our decision – this time, the Fed.  The need for control is powerful, and deploying your money wisely is the best way to control your financial future. That’s why we build financial plans and wealth strategies in the first place. And the wealth strategy you’ve built has been structured to anticipate this volatility, uncertainty and rising-rate environment. You’re in a better position to handle this moment than most, because you’ve done the smart, competent and powerful work of building an informed and thoughtful wealth strategy.

You are in control. It’s time to show it by making sound decisions with advice tied to your intentions and goals.

 

 

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