Personal Emotions should not be a factor in Personal Finance

by Kristina on October 10, 2011 · 2 comments

Good Morning DINKS.  Today we are discussing maybe the biggest mistake that we can make with our Investment, Savings, and Retirement Accounts; today we are discussing the mistake of making investment decisions based on our personal emotions.  As the case with many things in our lives that we do, people also  invest with their emotions.  It is very hard to set aside our personal emotions when it comes to our personal investments because people are made up of emotions.

Whether we are always cheerful and happy or gloomy and depressed, we always feel some type of emotion.  Sometimes when people act before they think and make a mistake they use the excuse  that they “let their emotions get the best of them.” This is true for investing and choosing investment options just as it is true for many other aspects of our lives.

Think about the last purchase, sell, or switch that you made in one of our Investment Accounts; was it business based or was it based on your personal emotions? When the market is bull (meaning it is charging ahead, gaining points, and making profits) people get happy, excited, and full of adrenaline.  However, when the market is bear (meaning it is hibernating, sleeping, loosing points, and not making profits) people get nervous and they start to panic.

As we get excited or nervous we may start to react before we have time to think.  When we make quick decisions before thinking them through we may not be making the best decision.  This is as true for investing as it is for all other personal decisions that we make.  I am sad to say that I was extremely guilty of this in the past.  In June 2007 I bought my brand new Honda Civic during my lunch break.  However, I am happy to say that I have learned from both my personal and financial mistakes in the past.  Now as I am older (and maybe wiser) I try to think twice about every decision that I make, both personal and financial.  I am proud to say that I have not made any big impulse purchases since I bought my car (and regretted it) in 2007.

When our personal emotions run high we act in the moment and we don’t think about the aftermath consequences of our choices.  When we don’t take the time to think through a decision, we usually make the wrong choice.  This past week I had a client call me to sell $195,000 of Mutual Funds in his Retirement Portfolio and put the funds into a Money Market Fund as he waited out the instability of the current market conditions.  He told me that he would re-buy his Mutual Funds “once the market comes back.”  I explained to my client that he has not yet realized the investment loss, currently it is only on paper because he has not yet sold the investments.  I advised him against selling any of his investments because the current market value was a lot less than his actual cost (book value).  He didn’t care, he wanted to put the money in a “safe” investment and in the process he actually realized a $37,000 loss in the value of his Retirement Portfolio.

It is funny that when we are in a bull market my 12  years of experience and 3 diplomas in personal finance are my golden key, everyone wants to take my advice.  But when we are in a bear market my 12 years of experience and 3 diplomas in personal finance don’t matter, my advice doesn’t count for anything because people make investment decisions based on their personal emotions.

The best investment advice that I can give to people is to focus on your long term goals.  If you are 35 and investing for retirement who cares if you loose $37,000 in 3 years because you have another 25 years to gain back the loss.  Besides, by the time we react to the loss it’s already too late.  The best thing that we can do is leave our investment where they are and wait for a market correction.

(Photo by Creative Donkey)