Non-Violent Communication For Healthy Financial Conversations

In today’s world, financial matters can often be a cause of stress and conflict within families and couples. Money-related discussions can sometimes spiral into heated arguments, with blame, defensiveness, and misunderstanding coming into play. However, these potentially difficult conversations can be managed more effectively using Non-Violent Communication (NVC).

NVC is a communication approach developed by psychologist Marshall Rosenberg. It focuses on empathy, compassion, and understanding as the foundation of communication. NVC is particularly effective when discussing sensitive topics like finances, as it encourages clear, empathetic conversations without blame or attack.

Observations, Not Judgments

Begin the conversation with an observation about the financial situation, rather than an accusation or judgment. “I’ve noticed that we’ve been spending more than our budget for the past few months” is less likely to trigger defensiveness than “You’re always overspending.”

Express Your Feelings

After sharing your observation, express your feelings. This shouldn’t be a hidden critique of the other person but rather, an ‘I’ statement about your emotions. “I feel worried when I see us going over budget” focuses on your concern, not blaming the other person.

Identify Your Needs

Articulate what you need in this situation, ensuring these are universal human needs, not strategies. For example, “I need a sense of security about our financial future” is a valid need, while “I need you to stop spending” is more of a strategy.

Make a Doable Request

Lastly, propose a concrete, actionable request. For instance, “Can we have a weekly review of our budget together?” is a specific and manageable action that can be negotiated and agreed upon.

A Scenario:

Imagine this scenario – you’ve noticed your shared bank account has been dwindling at a faster rate than usual.

Instead of launching into accusations, take a moment to apply NVC: “I’ve noticed our bank account is depleting quicker than it used to (observation). This makes me feel anxious (feelings), as I need reassurance about our financial security (needs). Can we sit down each week to review our budget and spending together (request)?”

Remember, It’s a Dialogue

A vital component of NVC is active listening. Encourage your partner or family member to share their feelings and needs too. Validate their emotions, even if you don’t initially agree, and work collaboratively to find a solution that meets both parties’ needs.

Patience and Practice

Patience and practice are key to mastering Non-Violent Communication. It may feel unnatural at first, but over time, it can dramatically improve the quality of your discussions about finances—and any other topic of potential conflict. By expressing yourself honestly and receiving others empathetically, you’re laying the foundation for open, constructive conversations, healthier relationships, and a more secure financial future.

So, the next time you’re about to embark on a difficult money conversation, remember these steps and use NVC to foster understanding and collaboration, rather than conflict and frustration

Disclaimer
The content on this site, provided by Able Wealth Management, is purely informational. While we aim for accuracy and completeness, we cannot guarantee the exactness of the information presented. The views and analyses expressed in this blog represent those of the authors at Able Wealth Management. They should not be considered as investment advice or endorsement of any particular financial instrument or strategy. Any references to specific securities and their performance are purely informational and should not be taken as advice to buy or sell.Before implementing any information or ideas presented, we strongly advise consulting with a financial advisor, accountant, or legal counsel. Investing carries inherent risks, including potential capital loss. Asset values can fluctuate over time and may be worth more or less than the original investment. Past performance does not guarantee future results, and Able Wealth Management cannot ensure that your financial goals will be achieved. Information from third-party sources has not been independently verified by Able Wealth Management. Although we trust these sources, we cannot assure their accuracy or completeness.

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Volatility Drag

Volatility drag, often unnoticed by many investors, plays a significant role in the performance of investment portfolios, especially in markets characterized by high volatility. Understanding volatility drag is crucial for making informed investment decisions and managing long-term investment performance.

Understanding Volatility Drag

Volatility drag refers to the negative effect of investment volatility on compound returns over time. It occurs because losses have a more significant impact on portfolio value than gains of the same magnitude. For example, if an investment loses 10% one year and gains 10% the next, the investment will not return to its starting value due to the mathematical asymmetry between gains and losses. This phenomenon underscores the importance of minimizing large fluctuations in investment value to protect long-term returns.

The Mathematics Behind Volatility Drag

The mathematical principle underlying volatility drag is relatively straightforward but profound in its implications for investors. The key concept is that percentage gains and losses are not symmetrical. A 50% loss requires a 100% gain to break even, not a 50% gain. This asymmetry means that volatility (up and down movements in price) can erode the compound growth rate of an investment, even if the arithmetic mean of the returns seems healthy.

Example of Volatility Drag

Consider an investment with the following annual returns: +20%, -15%, +10%, and -5%. While the arithmetic mean of these returns might suggest a modest positive performance, the compound annual growth rate (CAGR) would tell a different story, factoring in the volatility drag and showing a lower effective return than the arithmetic mean would suggest.

Implications for Investors

  • Risk Management: Understanding volatility drag emphasizes the importance of risk management strategies, such as diversification and the use of derivatives for hedging, to minimize significant downturns in portfolio value.
  • Investment Strategy: Investors might consider investment strategies that aim for steady, consistent returns over those with potentially higher but more volatile returns. Such strategies might include investing in low-volatility stocks, index funds, or using dollar-cost averaging to mitigate the impact of market fluctuations.
  • Psychological Aspects: Volatility drag also highlights the psychological challenge for investors who may overreact to short-term market movements. A long-term perspective is crucial for successful investing, as frequent trading in response to volatility can exacerbate the drag on returns.
  • Performance Evaluation: When assessing investment performance, considering both the arithmetic mean return and the compound annual growth rate (CAGR) can provide a more comprehensive view of an investment’s performance, factoring in the effect of volatility.

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