Emotions play a role in many facets of life, and many of us experience several of them daily. You may experience pure joy and happiness when a child is born and anger when that child does something to upset you later in life. Everyday emotions play into our decision-making. Some people avoid swimming in the ocean because a shark could bite them. They let the fear of being bitten by a shark steal the enjoyment of swimming in the sea. Some of the same emotions that drive our daily decision-making can also steer our decisions when investing in the stock market and planning for retirement. In the world of finance, this is called emotional trading or behavioral finance.
In his book, “The Psychology of Money,” Morgan Housel says, “Your personal experiences with money make up maybe 0.00000001% of what's happened in the world, but maybe 80% of how you think the world works.” That is a true statement; we let so much of what happens to us guide our thought process when it relates to our relationship to money. Emotional questions we often hear at The Financial Enhancement Group include the following:
- What if another crash happens like in 2007-2009? How will we retire or live through our 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 real, and they drive our decision-making. If you have a fear of another 2007-2009 happening, maybe you have been investing more conservatively than you need to over the last several years. Adversely, you may not hit your future retirement goals because you have not accumulated enough money. Not only did the fear of the next stock market crash jeopardize your retirement goals, but it also made the few questions above come more into play. Now, there could be a chance you will outlive your money in retirement or not have future Long Term Care needs met.
One way to combat emotional decision-making in your financial decisions is to start with the end in mind. Too often, we get caught up in the uneasiness of what today brings, and we don’t have our sight set on the course ahead. Knowing where you want to be, and your future goals, will allow you to focus on the journey and not the daily snapshot.
Markets go up, and they go down; you need 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.
The Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.