Investing and managing your wealth is both art and science, it never has been and never will be a cold, formula driven process devoid of humanity. As such one cannot ignore emotions when considering the best course of action to take. In fact, every investor should fully embrace the impact that emotions take when considering all things financial. These impacts can be good and they can be bad, but it pays to be aware that your emotions can make a positive and negative effect on your wealth.
When can your emotions be a positive effect on your investing and wealth? There are more occasions than you probably think. The emotion of your spouse being left penniless emotionally drives over 80% of primary wage earners to get life insurance, which is a very good thing. The desire to see your children go to college with less debt compels parents to open 529 plans early on, an action your children will certainly thank you for. Listening to your trusted advisor to take more equity risk in your portfolio so you do not run out of money, if applicable to you individually, will reap vital benefits in your later years.
On the opposite side of the spectrum of emotions, there exist negative aspects to how you feel about certain aspects of investing. The innate feeling of jealousy, for example, can move us to mimic and invest just like others we perceive as being successful. This is a very dangerous notion, as you actually have no idea of your friends’ risk tolerance, cash position, or likely anything about them financially. Therefore, copying any investment of another is wildly risky.
Over trusting your advisor is another emotional mistake, as our conversations with “Judy”, an investor our team has met with recently, illustrated. Judy had an advisor for a number of years and as she explained, partly due to her religious upbringing was taught to trust and have faith in what others told her, despite something in the back of her mind telling her something was not quite right. Not fact-checking and researching the advisor’s recommendations was in retrospect a mistake.
Judy and her husband finally found a new advisor, and now while they respect their new advisor, they always require proof and documentation of all changes their advisor suggests. As a result of the new way they deal with their investments, they have complete confidence and peace with their wealth and retirement.
Never opening your statements, investing in only one security, and not validating that indeed your advisor is actually licensed are among the long list of the ugly emotional actions an investor can take. Topping the list of course are all form of Madoffs, the vast majority being avoidable. Being overly emotional and purely trusting with zero verification is how people very rich and otherwise have been taken by scams.
Emotions are a vital part of optimizing your wealth, but they must always be matched by validation and together, you can ensure yourself a comfortable and calm financial life.
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