Emotions are part of life. Our decisions or reactions to events are often directed by emotions. You experience joy when a child is born and anger in the moment when that child does something that frustrates you. People avoid swimming in the ocean over the fear of rare events like a shark attack. The fear of being bitten by a shark steals the enjoyment of swimming in the sea. The same emotions that drive our daily decision-making also steer our decisions when investing and planning for retirement. The world of finance calls this emotional trading, better known as behavioral finance.
Morgan Housel, author of “The Psychology of Money,” says, “Your personal experiences with money makes up maybe 0.00000001% of what's happened in the world, but maybe 80% of how you think the world works.” Our perceived reality guides our thought process allowing emotional issues to override logical, long-term decision making. Emotional questions we hear often at The Financial Enhancement Group are:
• What if another crash happens like in 2007-2009; how will we retire or live through my current retirement?
• Will we outlive our money?
• What is going to happen to me if my spouse passes away?
• What happens if my spouse or I will need Long Term Care?
These questions are important, and the emotions surrounding them are real. Those emotions drive our decision-making. If you have a fear of another 2007-2009 occurring, your investment decisions may be overly conservative. Adversely, you may not hit your future retirement goals because you have not accumulated enough money. This emotional fear may jeopardize your retirement plans. An emotional decision today opens the opportunity for bad potential bad outcomes in the future.
One way to combat emotional decision-making in your financial decisions is to start with the end in mind. Knowing where you want to be, and your goals will allow you to focus on the journey and not the daily snapshot. Focusing on the long-term helps to diminish the fear of the short-term issues.
According to Aaron Rheaume, CKA (Certified Kingdom Advisor) and Director of Financial Planning at the Financial Enhancement Group, “Markets go up, and they go down; you have to have a defined plan in place to control your decision-making through the peaks and valleys. If you are always deciding to leave the market when you are in the valley, you have no chance to reach your peak. Having a plan in place will allow you to get through the market's emotional roller coaster and eventually help you reach your peak. Be persistent and consistent.”
What seems like the right emotional decision today could lead to financial troubles tomorrow. Doing everything to make your kids happy today will feel good in the moment, but did you do your job as a parent to raise and prepare them to be able to thrive on their own? The same question needs to be addressed with your emotional decision-making today and your financial journey for the years to come.
Joseph A. Clark is a Certified Financial Planner and Managing Partner of The Financial Enhancement Group, and an SEC Registered Investment Advisor. Article co-authored with Aaron Rheaume. Contact Joe at yourlifeafterwork.com or 800-928-4001. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by the Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.