Imagine you decided to buy an investment property, which will help you fund your retirement one day.
With the market steadily climbing, you can see how you’ll make a fantastic profit when you eventually sell.
You’ll have enough money to live comfortably, take a holiday now and then, and spoil your grandchildren.
But then the property bubble pops.
Your house declines in value faster than you imagined. Your family tell you to cut your losses and put the house on the market.
In a panic, you sell up.
A year or two later, the housing market bounces back. It will take years to recoup the money you have lost….
Hopefully, that kind of scenario has never happened to you.
But it’s a typical example of a powerful phenomenon which stops people making sensible financial decisions.
It’s a phenomenon lots of people have never even heard of and rarely recognise when it happens to them.
The phenomenon is called “emotional investing” - although I think it applies to every aspect of managing your own money, not just to investing.
It happens when you make financial decisions based on your feelings, not on rationality.
In the example I gave you, the dominant emotion was fear.
Studies¹ show that at times of high stress, people lose 13 percent of their IQ points and make reckless decisions.
There are few things more frightening and stressful than seeing your hard-earned money dwindling to nothing in front of you…
But many other emotions can come into play, as well.
It might be shame. People hold onto bad investments and ignore debt because they are too embarrassed to face their financial situation.
It might be aversion to loss. Again, holding onto investments you should have let go of long ago, because you can’t bear the thought that they have not panned out.
And it can be seemingly positive emotions too, like hope, excitement and (over-) confidence.
For example, buying stocks at the peak of a bull market just in time to see your investments decline, because that’s what everyone else is doing and you are excited to ride the wave (and I’m guilty of this, too!).
It is difficult to make smart, unbiased decisions about money when emotions are involved.
But if you manage your own money, you can’t escape the emotions.
After all, you have worked hard to earn and save the money you have. You are invested in that money giving you a return. And your very future may depend on it.
This is why working with a financial adviser is so important – even if you are quite good with money.
A professional adviser will look at your situation completely objectively, and advise on the best course of action to help your money grow.
They care about you and want the best for you, but they are not emotionally invested in your money or your life.
They can make logical, calm decisions, without feeling the same kind of pressures you do.
It’s one of the reasons why people who take professional financial advice tend to see better outcomes than people who manage their money unadvised – as we mentioned in my last blog.
Ironic, isn’t it? I’ve heard people say they don’t want to use a financial adviser, because “no one will ever care about my money as much as I do.”
But that’s exactly why they need professional advice!
Topics: Insights & Advice