Fight Off Your Financial Demons

Anyone with children knows about night terrors, the common sleep disorder in which a child bolts upright, not quite awake, screaming, sweating, and crying inconsolably. I've been lucky; none of my three kids experienced night terrors. The problem is -- their mom is having them.

They're not officially night terrors because I'm wide awake. And there's no crying -- it's more a panicky undercurrent, a repetitive rumination of mistakes, regrets, and to-do lists. Tasks that are commonplace in the light of day -- working, making the lunches, doing laundry, saving for college and retirement -- loom impossibly large at 2 a.m. I might as well be coordinating the air assault and amphibious landings at Normandy.

I ponder the ETF I shouldn't have bought; the endless domino of job losses in the media; the friend who died of skin cancer, a protracted tragedy that started with a small mole found between two toes. In the dark of night, I ask, what if...?

Critical Rumination

Given the upheaval in financial markets, there's a lot of critical rumination going on. Even Harry Markopolos, the investor who repeatedly warned the Securities and Exchange Commission that Bernard Madoff was a fraud, is having trouble sleeping, according to a 'Wall Street Journal' article. He wishes he could have persuaded Thierry Magon de La Villehuchet, the French money manager who committed suicide in December, to avoid Madoff's Ponzi scheme.

Researchers have found that there are two kinds of rumination -- analytical and experiential. The former can actually be constructive, says Sonja Lyubomirsky, psychology professor at University of California, Riverside, and author of 'The How of Happiness'.

"Rumination can help you find out what's important," she notes. "When your goals are not being met, or not progressing as fast as you expect, that leads to self-focus -- you ask why so you can address it. You dwell on things that aren't going well in your job; maybe a colleague makes more money and it's unfair. But it might lead you to do something about it, like ask for a raise or change something you're doing at work."

Unhealthy Effects

The other kind, experiential rumination, can exacerbate depression, impair problem-solving, and erode social support, as friends and family grow weary of constant negativity. It's most common in people who are already depressed.

"What we've found is, if we induce people to ruminate and they're already a little distressed, it makes them feel even more overwhelmed and pessimistic," Lyubomirsky explains. "[Experiential] rumination is the opposite of problem solving -- instead of taking it step by step and going from A to B to C, it's like going in circles."

These ruminators are more self-critical, more likely to blame themselves for their current problems and express reduced self-confidence and optimism in overcoming those issues, researchers found. When presented with hypothetical negative life events, they choose gloomier and more distorted interpretations, minimizing their successes and over-generalizing from their failures.

Compounding the Problem

Moreover, ruminating leads to procrastination, which can compound the initial problem. For example, Lyubomirsky and several co-researchers found female ruminators with breast cancer symptoms experienced greater distress, so they delayed seeking a diagnosis -- waiting more than two months longer than non-ruminators to report warning signs to a physician.

Financial planners say they perceive more rumination among clients these days, and urge them to take action.

"What makes the markets tough is that there is nothing you can do as an investor to escape the overall economic environment," explains Charles Farrell, a Denver financial planner and attorney. "So you must either accept the volatility and uncertainty or opt out of the game. I think it is best to confront the issue and force the investor to make a decision to stay in or get out. Worrying about it won't change anything and is harmful to their overall mental and physical health."

The stock market, Farrell wrote in an email, is "like an elevator; each day it stops at a different floor and gives you the chance to get off. I think J.P. Morgan said, 'Sell down to the sleeping point.' That is good advice. Get the allocation to risky assets [generally stocks] down to a level you can live with. Box it into a corner, and then go about living your life."

Avoid "Money Porn"

Kevin McKinley, a Wisconsin financial planner, author, and host of the public radio program 'On Your Money', advises clients to tune out the market play-by-play, as well as news stories about layoffs or the economy.

"Do not watch the ‘money porn' television channels," he wrote in an email. "Nobody knows for sure how this is going to turn out, or what's going to happen next. Understand that many of the people who are telling you that the end is near are the same ones who in 2007 were telling us that good times would never end."

Lyubomirsky and other researchers have found that diverting attention can break a cycle of rumination and lead to clearer decisions. "If you're dysphoric, pay direct attention to something neutral or something positive," then focus on reappraisals and revised goals, Lyubomirsky says.

Create New Goals

For example, California recently instituted unpaid furloughs two days a month for state employees. "Losing that money might mean a significant dent in life," Lyubomirsky says. "Rather than dwelling on it, create new, meaningful goals for those two days -- retrain for a different job, spend time with the kids."

Other distractions can be as simple as reading, playing sports, meditating, or spending time with friends. "Just be careful that you don't have a friend who ruminates along with you," Lyubomirsky adds.

Once you've cleared your head, project your own financial scenario using worst-case scenarios, such as lower rates of return, higher taxes, lower salaries, and more personal responsibility for expenses, McKinley advises. "Can you still ‘make' it?" he asks. "If not, take the action necessary to improve your odds -- increase saving, cut spending, lower your taxes."

Practice Gratitude

Another proven strategy to curb rumination is practicing gratitude. McKinley recommends clients write down all of their financial and other worries, ranking them from the most frightful to the most benign. Then note all of the things in your life for which you are thankful, such as your health, family, or job, according to what you value most.

"Start at the top of your 'thankful' list, and ask yourself if you'd give up anything on the thankful list to make something on your ‘worry' list go away," McKinley wrote in an email. "Chances are, the answer will be ‘no' and you will realize how fortunate you are."

by Laura Rowley