One of my strongest beliefs is that the emotional side of money and investing is the most powerful yet often overlooked factor. Emotionally charged investment decisions almost never pay off, whether they come from a basis of fear or greed. When creating or updating an investment plan, you need copies of your financial statements and a calculator, but I think more importantly, you need to build an acute awareness of how emotions have affected your behaviors. Emotions may cause distraction, and force decisions that are centered on factors outside our control. Effective plans are built on making decisions that center on controllable factors. Money decisions are a reflection of ourselves, and affect how we relate to one another in very complex ways. The most successful plans are driven by decisions that come from a confident yet humble outlook. It is important to continually try to improve your investment plan, and consideration of the emotional side you will supercharge your efforts. Let’s look at a few writing exercises that can help you build better balance:
1. Write down the 2-3 best and 2-3 worst financial decisions you’ve ever made (they can include spending decisions or investment decisions). In thinking back, what factors influenced your decisions, and were there any emotional components? Was the speed of your decision a factor, if so, how? What would the outcome have been if you had done something different?
2. Think about how money factors into your family relationships. Who has affected your attitudes about money, and how (include both positives and negatives)? Do you know anyone who has gained or lost significant amounts of wealth, and has this affected you? Honestly ask yourself if you feel either entitled, or perhaps not worthy of having or building wealth. Do you use money to affect your relationships, if so, how, and is this behavior ok?
3. Evaluate your spending habits. Some people are overly constrained, while others tend to launch into unnecessary spending binges, where do you fall? Have emotional factors in your life influenced your habits? Have you ever overthought a decision to the point of paralysis, causing you to miss out on an opportunity?
4. How do you collect information about the stock market? Is your process systematic or random? Do you have an objective methodology to offset the barrage of random and inconsistent news and information? How often do you get overly focused on information that later turns out to be moot?
Being confident yet humble as an investor is critical to success. Nobody ever built substantial wealth by investing in overly conservative fixed-rate CD’s and cash. On the flip side, the most successful investors acknowledge and learn from their mistakes, while others fool themselves and everyone else into thinking they are a stock market genius. Continually evaluate and improve your approach, and you will be a wildly successful investor. Exploration of the emotional components will enable you to be proactive and make your outcomes even better! Hopefully you found this exercise to be helpful and as always, please e-mail or call me with any questions, I really love hearing from everyone! -Katy
© 2013 Pawleys Investment Advisors, LLC. All rights reserved.