Don’t Let Emotions Get in the Way of Your Financial Decisions


As human beings, we are naturally emotional creatures. It’s only natural that we have a habit of carrying our emotions into various areas of our lives, finances included. However, money and emotions don’t mix well.

“The most powerful tool we have for minimizing our spending is to remove emotion and raw impulse from the equation,” says financial blogger Trent Hamm in the Christian Science Monitor.

It’s only natural that we have a habit of carrying our emotions into various areas of our lives, finances included. However, money and emotions don’t mix well.The same is true for investing and retirement planning.

“Investors — however smart, seasoned or wealthy — are only human. Faced with dramatic market fluctuations … many otherwise even-tempered investors might be tempted to act rashly — and irrationally,” notes Kenneth Kiesnoski of CNBC.

Here are some examples:

Joy/greed

These feelings often work together when a portfolio is performing well. Investors may be tempted to stay the course rather than going with the trusted and proven principle of rebalancing.

Envy

Investing results can rarely be duplicated. Hearing about a strategy that was successful for a co-worker, for example, may lead you to go that route yourself in the hope you will get the same result. However, that person’s strategy may not fit with your own situation, risk tolerance or timeline.

Pride

This emotion could cause you to hold on to a poor investment until you recover its value.

“While I don’t advocate jumping ship the moment a fund or asset class hits rough water, I also don’t advise going down with a sinking ship,” says Scott Holsopple of U.S. News & World Report Money.

Fear/anger

These work in conjunction, creating a sort of fight-or-flight response and causing you to make rash decisions out of instinct rather than rationale.

Love

Don’t let sentimentality keep you tied down. For example, if you feel allegiance to the first stock you ever bought but it is tanking, cut your losses.

What to do

Your Individual Retirement Account (IRA) is one of the four main components of a financially secure retirement. Anyone under the age of 70½ with wages can contribute, the annual contribution limits have been increasing and there are tax benefits.Instead of succumbing to emotions, stick to your own tried-and-true investment strategy. Take a step back and re-evaluate the situation from the outside looking in.

“If you see your emotions flaring, focus exclusively on the task at hand. Don’t get distracted by those emotional elements,” Hamm recommends.

Another option is to give yourself a spending cap. Allowing yourself only a certain amount to spend or invest will often stop you from putting money into something foolishly.

Holsopple summarizes that giving yourself basic rules to follow in spending situations will help you drown out the noise, including that coming from inside your own head.

“The next time your fear, envy or pride gets the best of you, relax and remember that you’re in this for the long haul and you’ve got the strategy in place to get you where you want to be,” he concludes.

When you invest, it’s always helpful to consult with professionals so emotion doesn’t play as much of a role in your decisions. Stop by to speak with one today.

 

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