How to Beat Market Volatility: Hit Pause Button

There's no shortage of market drama to be swept up in these days. Wild day-to-day gyrations in the stock market have ominously made a comeback. The specter of a Greece/Europe contagion has ratcheted up talk that we (and that is a global we) could be heading for a double dip recession. That's plenty to bring on a whole new round of financial insecurity: is your 401(k) going to tank (again), is your job safe, and, gulp, is there another painful leg down coming for home values?

And if there's one thing that the behavioral finance folks have hammered home to us, is that when we're anxious and scared, our emotions tend to screw up our financial decision-making. We find it excruciatingly hard to slow down and separate fact from feelings when fear kicks in, and that can lead to some costly mistakes.

In his new book Financial Intelligence: How to Make Smart, Values-Based Decisions with your Money and Your Life, CFP Doug Lennick suggests the antidote to react first-think later, is to hit an internal pause button. Not stop, but pause. So you can then logically and rationally think through what, if anything, needs to be done to make sure your financial life continues to serve your long-term goals.

The 4R Approach to Beating Market Volatility
Once you've hit the pause button, Lennick lays out a four step process to how to proceed:
RECOGNIZE what is happening in the world and how you are reacting. The idea here is to step outside of being caught up in the moment, to realize it is in fact a stressful moment and keep yourself from taking an emotion-based leap

REFLECT on how whatever is happening and how whatever you are contemplating could impact your long-term life goals. This is the heart of Lennick's 4Rs. His recommended foundation for all key decision making is not what you think about the direction of the Dow for the next three months or whether your home might sell for more in 12 months, but whether it serves the values that matter to you and your long-term goals. "Reflection forces us to evaluate the reliability of our 'outside in' responses to situations," writes Lennick. "It's what gets us out of our impulsive nature."

REFRAME your thinking. Okay, now that you've pulled yourself out of the moment how might your thinking change when recast in the context of your big-time goals?

RESPOND, if necessary. This is the end step that flows from the first three steps. Lennick makes the good point that when you get to this 4th R you should circle back through the whole process again and really check that you've hit the Goldilocks sweet spot of being neither too pessimistic or too optimistic in all your reflecting and reframing. A recommended step here is to ask yourself, "What might be some unintended consequence of the response I am considering?"

R you on Board? While there's nothing revolutionary here, I think that's a virtue. Sometimes we make financial decision-making so hard and confusing we freeze up, or worse, make the wrong moves. The 4Rs are commendable for being so straightforward you can actually -- fairly easily -- follow through and become a smarter decision maker.

"We may not always be able to prevent our brains from kicking up an emotional storm in the face of a financial danger or opportunity, but we can, by practicing the 4Rs keep our emotional brains from hijacking our rational brains," writes Lennick. Given all the forces swirling around our heads threatening to do that costly hijacking, keeping the 4Rs in mind seems like an especially smart move right now.

Related MoneyWatch articles:
How to Take Advantage of the Stock Market's Volatility Four Ways to Fight Panic
Overreaction Can Hurt Your Portfolio

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