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Five Rules for Pessimists Regarding Their Money

Pessimists are given a hard time regarding the way they deal with personal financial matters. However, they seem to score over optimists in matters of money management, according to Allan Roth, who is a financial planner and a blogger with CBS Money Watch.

Pessimists are very cautious in money matters, and they will save more because they tend to worry more than most people. Studies have been done on the behavior of pessimists and optimists as regards their gambling habits, as this is a good indication of their behavior in the stock market. It was found that pessimists reduced their gambling and realistically expected less when the odds were against them, and in this way their loss was greatly reduced. The trait of caution on their side, pessimists are able to create larger retirement accounts and more stable financial investments accounts. If pessimism is in your nature, you should rely on that need for what is real, while at the same time, factoring in the negativity of the situation. So while you can be aware that a stock market crash could occur, it is helpful to bear in mind that risk taking can at times payoff.

1. Learn to Control the Fear you Feel. In pessimists this fear is blown out of proportion. Dan Ariely, behavior economics and psychology professor at Duke University, states that the pessimist will feel miserable when he experiences loss, but when he experiences gain, he feels less happy than he imagined he should feel. What pessimists need to see is that risk is one of the outcomes of practicing a business, and that he has to accept that taking risks is necessary. A good example of the risk to be faced lies in the area of retirement investing. There are greater chances that the  money markets will be  trailing inflation for the next 30 years, but the chances that the stock market remaining stagnant for the next 30 years is very low.

2. Allow Yourself to Spend. Pessimists, need to allow themselves to spend money from time to time. Regardless of how much a pessimist has, he feels he will be wiped out financially, if he gives himself the permission to spend. This fear goes beyond being frugal, since it can be taken to the extreme that the pessimist lowers his quality of life even though he is sitting on a huge investment nest egg. The pessimist could be in his eighties, but will still feel regret at the fact he did not give himself permission to go on vacations when in his 50s and 60s. A separate account could be set aside specifically for those purposes. Do not include those funds when you are figuring your needs for the future; you will be more at ease with your decision to spend that money that was specially set aside.

3. Choose a Partner. According to Moshe Milevsky, a York University professor in finance; it is helpful to discuss your financial decisions and thoughts with. The perfect person will be someone who is more middle-of-the-road, and will neither share your pessimist views or someone who will not be overly optimistic. This person can be a spouse, a financial planner of even a friend, and he will act as a sounding board, neutral but helpful.

4. Evaluate Your Insurance. According to Milevsky, especially with life insurance, pessimists will over-insure themselves. This could easily become a waste of a person’s money especially if the policy’s value and your financial obligations are out of sync with one another. You should look critically and reasonably at the premiums you are paying and also analyze the insurance you are getting. Life insurance is intended to replace your income for your family in the event you die.

Therefore the insurance you purchase should provide for just that situation and nothing else. Extended warranties should be treated in the same way. These warranties may not always be worth it, and you should consider the possibility of these items actually breaking. You should always consider the possibilities using, not negativity, but realism. Next you should consider using any money you would have put towards warranties, in a savings account.

5. Do not Constantly Scrutinize Your Portfolio. According to Ariely, you will only make yourself miserable if you only see negatives and constantly scrutinize your

investments. Especially do not overact. As relates to wanting to avoid loss, do not act on the spur of the moment. A good example of this would be to suddenly remove all your money from the stock market simply because you are trying to avoid an imagined future misery you feel certain you will experience. Evaluate carefully your situation, but make sure you are evaluating on sound principles and not emotion. You should think of being in for the long haul. The market may have crashed recently, but the history shows that it will rise to higher highs within a year or two.