Investment Advisor Representative
Registered Financial Consultant
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When Your Emotions Fail You
The greatest enemies of the equity investor are expenses and emotions – Warren Buffet.
In a perfect world, logic would always guide our financial decisions. Emotions wouldn’t come into play. But we don’t live in a perfect world. Far from it. Fear, anxiety, ad greed can make us impulsive. These emotions can blind us to logic and make us vulnerable to all sorts of biases. That is never more true than when we feel threatened or stressed.
When we are faced with uncertainty, fear and instinct can take over and push logic right out of the window. Your brain will make you want to react quickly to protect yourself and avoid the pain you anticipate from potential losses. Ironically, these instincts often make things worse. Emotional reactions can lead to poor choices and the losses you were trying to avoid in the first place.
That means our emotions impact our financial choices more than we realize. Shockingly as much as 95% of our purchase choices are made subconsciously, driven by our emotions – as little as 5% are based in logic (and that is when we are in a good headspace and feeling comfortable and secure).
No matter how much investing experience you have, uncertainty can get in the way of making good financial decisions. In fact, when market turbulence lets fear creep in, you can become vulnerable to herd behavior, panic, and irrational choices. And that can mean acting against your interests and opening yourself up to more losses. There is an easy way around that, though. It involves changing some of your thinking and reactions in the face of financial stress and uncertainty.
When emotions run high and impulse takes over, we are usually focused on reacting quickly to protect ourselves. This can lead to short-sighted, riskier decisions. It can also result in more losses. That is the essence of what Warren Buffet is saying above. But that is not all he is saying. He is also telling us that the emotion, like any perceived enemy, can be fought – that you have power to set emotion aside and make better financial choices, no matter how uncertain the outlook may be.
The truth is that emotions are essential to the human experience. When they take the driver’s seat in financial decision making, however, they can skew your perspective and undermine logic.
Counteract this by recognizing intensive emotions and giving them some time to cool down before you make a choice. This can give you a space to see the facts more clearly – and potentially lead to better, more logical financial decision making.
If you are like most investors, you think you are are ahead of the curve. In fact, research shows that nearly 2 in every 3 investors say they know more about finances than at least 70% of the population. Yet, 56% can’t pass a financial literacy test. They get at least 6 out of 10 questions wrong. This disconnect between what we think versus what we actually know can lead to overconfidence. Even for us pros. That is why we use research, processes, and systems to make decisions. To protect us from our own overconfidence. As easy as it can be to fall into the overconfidence trap, there are things you can do to avoid it. If you can stay realistic and keep an eye on your longer-term objectives, you can keep your confidence in check and empower yourself to make better financial decisions.