- Many investors let emotions control their investing approach, whether greed, excitement or fear.
- But, as Joel Wade explains today, a different approach may be the real secret of wealth.
With the historic bounce in stocks over the last three months, many investors are kicking themselves about what they did – or didn’t do – as the market crashed in the first quarter.
What they wish they didn’t do, of course, was sell in a panic and run to cash. What they wish they had done was pick up some great investments during the fire sale.
Millions of folks are in this boat, of course.
If you’re one of them, let me provide some perspective – and help prevent it from happening again.
In my practice as a psychotherapist and life coach, I have seen many people distraught or anxious. But one recent client was really stressed out.
His closest relationships were on the rocks. He couldn’t sleep. Even his health was suffering.
All thanks to a recent turn in his financial life.
He had lost a huge sum of money in his portfolio, thanks not just to the volatility of the market but to the volatility of his own emotions.
He had let fear overcome his rational faculties – and now he was filled with regret.
When stocks were sailing smoothly higher, he had clear, sound strategies for his investments. But as the market collapsed, he became afraid – and angry – and those strategies went out the window.
And not just this time. Every time there was a sharp market break.
Don’t get me wrong. Fear and anger can offer important information to consider… up to a point.
But when our emotions create a kind of tunnel vision, where all that seems to matter is getting immediately to safety, we’re disengaged from our higher brain function.
A more primitive part of our nervous system takes control: the instincts of fight or flight. And since there is no fighting the stock market, we flee.
Our emotions are great for reacting immediately and automatically to a physical threat – like a predator wanting us for dinner or a mortal enemy confronting us with a weapon.
Under those circumstances, our vision narrows, our heart rate increases, and our muscles are charged and ready for action. And because of this, in that specific type of situation, our chances of survival go up.
But our chances of making good investment decisions – or communicating effectively with our friends, family or colleagues – go way, way down.
When we’re charged up in our sympathetic nervous system, anything that requires complex strategic thought and action goes out the window… along with any money that may be on the line.
A hyperemotional state is not even good for sports.
Yes, a professional athlete will get revved up for the game and will tap into this excitable part of his nervous system.
But when we see an athlete “lose it” on the playing field – getting into a fight, consumed with anger – chances are he will lose the game as well.
Without the higher brain function available, there is a limited ability to think clearly or to connect with teammates – or even opponents – and realize the subtle cues that make the smart plays possible.
In the financial arena, this means that if we have a sound investment plan, our primary goal should be to stick to the plan, no matter what the news backdrop or how we may feel.
If we get thrown off by emotion, the essential course correction is to redirect ourselves back to that plan.
This is also true in our most important human relationships.
If I let fear or anger decide what I do or say, and I blow up at a friend or colleague, the predictable reaction I’ll get from them is defensiveness and resentment.
What I won’t get from them – or myself – is self-reflection, conscientiousness and a solution to our problem. Instead, we’re simply engaging in a primitive dance of emotion.
We need to find our way back to our rational mind, to our preplanned strategy and to a way of behaving that doesn’t create regrets.
Effective thinking and action – rational rather than emotional behavior – can turn a disaster into an opportunity, in both your portfolio and your personal relationships.
It’s remarkable how much money we can save – and make – when we master our emotions.
By reacting slowly, thinking rationally and taking a long-term perspective, we safeguard our portfolios – and our most important relationships.
Joel F. Wade, Ph.D., is a contributing writer for Liberty Through Wealth. He is the author of The Virtue of Happiness and Mastering Happiness, and the host of The Mastering Happiness Podcast. He works with people around the world as a marriage and family therapist and life coach. Visit his website to receive a free Learning Optimism e-course.