We love the quote “Don’t make promises when you’re happy, and don’t make decisions when you’re sad.” It’s a beautifully simple reminder to take a step back and approach your situation with a dispassionate attitude.
While financial media often focuses on how emotions can disrupt your investing strategy, it’s also important to consider the impact emotions can have on your overall financial plan.
Here are our top tips to prevent your emotions from getting the best of your finances.
In the short term: Distinguish between wants and needs.
People tend to overspend when they’re feeling emotionally volatile, so be mindful of your emotional state then next time you go on a shopping spree and challenge yourself to ensure you’re buying things you truly need.
Are you spending because you recently lost 10 pounds and need better-fitting clothes, or are you spending because you’re feeling sorry for yourself after being passed up for a promotion?
Know the difference between true wants and needs, and don’t spend mindlessly whether you’re happy or sad.
When investing: Keep a long-term perspective.
Dalbar, a financial services research firm, contends in their 2017 “Quantitative Analysis of Investor Behavior” that the average equity investor earned only 7.26% in 2016. That’s nearly 5% less than what the market returned. The opportunity cost over the long run is immense, especially when you factor in the magic of compounding.
Unless you’re a day trader, it’s important to have a long-term perspective when you’re investing to help you avoid overreacting to short-term market movements. If the money you have invested in stocks is money you aren’t planning to spend for 15 years, it doesn’t really matter where the markets will be tomorrow, or even six months or a year from now. What matters is where the markets are 15 years from now.
For family finances: Work with an objective third party.
With over six decades of financial advising experience between the two of us, we can tell you that our job very often entails listening to clients describe sensitive family situations like death, divorce, disability, and beyond. Conversations naturally become emotionally charged.
We understand that it’s nearly impossible to take emotions out of the equation when it comes to your loved ones—and you shouldn’t have to. That’s where the value of an objective third-party like an advisor comes in.
A good financial advisor should know you well enough to be able to discern when emotions may be prompting you to act in potentially destructive ways. The most common example is when there’s an unexpected death. While certain financial moves do need to be made within a certain timeframe, it is usually not wise to immediately make major changes in asset allocation or make large financial gifts. Your financial advisor may ease the burden by coaching you along appropriate steps that are in alignment with your financial and/or estate plan.
Mixing finances and emotions can be a recipe for disaster. Remember these three simple tips to help you keep a level head in good times and bad.
This article was originally published on 9/19/17 in the Brainerd Dispatch.
Series 7 & 63 Securities Registrations,1 Series 66 Advisory Registration, † Insurance License Bruce has been in the financial services industry since 1983 and is one of the founders of Wealth Enhancement Group. Since 1997, he has hosted the “Your Money” radio show, a weekly program that focuses on delivering financial advice in a straightforward, jargon-free manner. Bruce also hosts with the "Mid-Morning" crew on WCCO-TV each Tuesday morning to...Read More