By Byron Moore, posted April 10, 2017
Originally published in the News Star and the Shreveport Times on Sunday, April 9, 2017.
Q: I know everyone is all bullish on the stock market now that Trump has been elected, but I just don’t trust it. I’ve seen it crash two times before and I’m looking for a third crash any time now. I used to be more optimistic, but not anymore. What do you think?
A: Sometimes I think it would be a good idea if I got up each morning, looked myself in the mirror, and said, “You’re an emotional idiot. Go get some perspective.”
When it comes to our financial lives, much of what we call objective judgment is really reactive emotion. Maybe you’ve been burned (in the stock market, at a job, by a business associate), so you say, “Never again!”
Or, your investment account climbs ever higher and higher, and convinced this is the tree that will grow all the way to the sky you throw more money into the account when it is at an all time high.
Emotions tend to interpret life for us as we are experiencing it, often before we can “put it into words” or think very cognitively. Emotion often arrives before cognition has a chance to kick it (especially if your cogitator is as slow as mine). Emotions enhance joys, warn of dangers, and register pain.
Emotions are a lot of wonderful things, but they are rarely precise. They tend to undershoot or overshoot reality. So when you become aware that your financial emotions may be shouting louder than usual, it is useful to ask yourself some questions.
Am I overestimating the positives? This happens in the world of investing. A particular mutual fund or investment manager has a good run and we assume that history is a good predictor of future performance. By itself, past performance is not a good indicator of whether or not results in the future will also be positive.
Am I overestimating the negatives? On the other hand, suppose you had money in a particular mutual fund or investment manager and we experienced a bear market (such as in 2008-09). Though that fund or manager’s performance during that period was mostly determined by external circumstance (a bear market!), we may blame her for our experience. Our financial emotions overreact to that negative experience, perhaps causing us to no longer use a perfectly good fund or manager. Painting with a too-broad brush, we blame everyone we can think of for our pain.
Am I underestimating the positives? I see this often when people come to see me for pre-retirement readiness counseling. They’ve done their best, but life hasn’t been easy. They’ve stayed as faithful as they could to their savings and investment goals, but they’ve also experienced some set-backs. I can see that look in their eyes when they first sit down, like I’m the financial oncologist who is about to tell them whether they have six weeks or six months to live.
I love it when I am able to say to those people, “Well, you don’t have enough money to start acting stupid, but you have enough money to retire.” I’ve seen tears. I’ve seen smiles. I’ve seen chairs almost fall over backward.
For so long, they had underestimated the good they were doing by just faithfully working, saving, and living within their means. And it caused undue worry for way too long.
Am I underestimating the negatives? I see this one a lot when individuals are making insurance decisions (of any kind). Whether protecting against lawsuits, disabilities, accidents, illnesses, or even death, we tend to underestimate the financial damage done by any of these circumstances. We don’t want to think how expensive any of those events might be, so we put our heads in the sand and choose not to look.
Financial emotions do not need a cure. Emotions (financial or otherwise) play an important and vital role in life.
While not needing a cure, financial emotions do need a companion. And that companion is a financial plan.
At the most basic level, a financial plan should offer protection against catastrophes, provision for contingencies, and preparation for the future.
One goal of a wise financial plan should be to help avoid emotive, circumstantial behavior swings towards hyper-optimism or hyper-pessimism.
And that’s something you can feel very, very happy about.
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