In his book, The Psychology of Money, Morgan Housel argues that the key to financial success is understanding how your emotions and beliefs impact your financial decisions.
Humans are emotional beings, and we attach emotion to all things that are important to us — our relationships, our careers… and our money.
Being emotional about money is normal. But emotions can cloud your thinking, leading to some irrational (and costly) decisions, like:
- Paying well over the asking price because we fall in love with that house…
- Buying the hot new stock at inflated prices because “everyone” says it’s the next Microsoft…
- Going on vacations we can’t afford “because we deserve it”…
We do all sorts of things that have the potential to sabotage our financial success, often without even knowing we’re doing it.
So how do we protect our financial future from our own emotions?
Why do we get emotional about money?
Many people have a complicated, emotional relationship with money based on their values, experiences, attitude and upbringing.
The emotions most associated with money and finances are:
- Fear — When it comes to money, we can be fearful of many things, such as not having enough, being judged by others based on wealth or fear of rejection by those who are not in the same financial “tribe.”
- Guilt — You might feel guilty if you’ve had more financial success than your friends or family, especially if you feel your success came too easily. You also might feel guilty if you haven’t shared at least a portion of your good fortune with others.
- Shame — Shame prevents a lot of people from seeking financial advice because they don’t want anyone to know their shameful “secrets” — spending too much, saving too little and being financially illiterate, for example.
- Envy and greed — When you hear that so-and-so made big money buying stock from XYZ company, there’s a natural tendency to rush out and buy some for yourself… often with devastating financial consequences.
Greed and fear, in particular, can affect our brains in a way that causes us to ignore common sense and lose self-control, which can then lead to feelings of guilt or shame (depending on the outcome).
And for many people, their self-worth is determined by their income and wealth — and what can be more emotional than that?
Strategies to make investing less emotional
At Bick Advisors, we feel it’s important to have a goal before investing and to make sure each portfolio is reviewed to make sure it aligns with a particular clients’ wishes —it’s about meeting clients where they’re at, and understanding what their history may be in order to guide them.
It’s about giving them the tools and information they need to make sound financial decisions so they can sleep at night.
Here are just two investment strategies that help emotional investors make unemotional investment decisions.
Invest using dollar-cost averaging
Dollar-cost averaging is a strategy that involves investing a set amount of money at regular intervals, regardless of market conditions. When the market goes down, your fund is buying shares at a lower price, and when it goes up, your shares rise in value.
This approach takes emotions out of the equation since the amount and timing of the investments are predetermined — especially if you feel pressure from unpredictable world events.
Diversification of your portfolio
Also known as “not putting all your eggs in one basket,” diversification can help minimize your emotional response to market volatility. In normal market cycles, a loss in some investments is offset by gains in others.
We’re here to help you
According to Housel, “Ordinary folks with no financial education can be wealthy if they have a handful of behavioural skills that have nothing to do with formal measures of intelligence.”
Skills as simple as:
- Living within your means (making $20 and spending $19)
- Not buying that “sale” item you don’t need (I’d rather buy something I need for $2 than spend $1 on something I don’t need)
- Developing a sense of what it means to have “enough”
- Not letting fear or shame stop you from seeking financial advice
- Creating a plan and sticking with it
Our advisors can help you understand your emotions about money to keep them from overpowering your logical thoughts and derailing your financial future — and this self-awareness will help you make the right financial decisions for the right reasons.
For help with emotional investing and all your investing needs, contact one of our advisors today… we’re here to help.