Emotional Investing: Part Two


Prepared by the Hardee Investment Group and RBC Wealth Management –

In Part One, printed last month, we introduced Dr. Kathleen Gurney’s perspective on emotional investing. She is a psychologist specializing in psychodynamics of money management and investing, and the Hardee Investment Group and Dr. Gurney share the same thoughts when in comes to emotions driving investment decisions.

In the previous article, Dr. Gurney boldly stated the majority of investment losses are not a result of a poor market place but rather from emotional and attitudinal causes. She went on to say investing, in and of itself, is an emotional business, and there are few investors who can readily control the emotions associated with the business. Below Dr. Gurney provides some tactics to help manage the emotions associated with market highs and lows.

The field of behavioral finance has given insight into some mental miscues investors make that might sabotage and crimp their returns:

Fear of Losing Money: Psychologically, people give greater weight to a past loss than they do to a future gain. In fact, some individuals find losing money so distasteful that they talk themselves out of investing altogether. Some investors don’t make reasonable trade-offs because the drive to avoid loss sabotages any future gains or opportunities.

Possible Solution: Determine ahead of time exactly how much you can “emotionally” afford to lose as well as “financially.” They are often very different.

Worrying About the Wrong Risks: Investors are held captive by events that could be conceived as unpredictable or frightening events. People are traumatized by dramatic events. They can’t tolerate the anxiety that accompanies them. Investors often become blind and deaf to others’ advice in these times and tune out advice from others, including their financial professionals. They exaggerate current crises. What’s worse is that they forget the wisdom of lessons from the past. They overlook the fact that people who stayed fully invested during previous crashes recouped their losses.

Possible Solution: Base your decisions on what you can control, not on those factors you can’t control. Review the rationale for your current strategy, and ask yourself if you feel it still makes sense based on everything you and they know at the time. If it does, review why the strategy still makes sense from time to time so you can help regulate any impulsive and emotional reactions that may bring you off course.

As you evaluate your investment strategies and investors’ individual situations, consider these points:

• Investors are more prone to make or lose money as a function of their emotions and attitudes than on the basis of their stock selection or trading system.

• The best system can be rendered a losing proposition by inappropriate implementation due to emotional and behavioral limitations.

• Appropriate or successful investor behavior can be learned to a large extent. Education is essential to helping investors stay in control and continue to grow, particularly in learning self-regulation and self-control. Copyright Kathleen Gurney, Ph.D, CEO Financial Psychology Corporation.

Dr. Gurney’s words couldn’t be truer. If you can step back and make rational, rather than emotional, investment decisions, you’ll probably do well. Otherwise, investing takes an emotional toll, if you allow it. Some investors cannot deal with that turmoil, and that’s why we’re here. The Hardee Investment Group can help you take the emotions out of investing and focus on the rational side. We’d be delighted to help you and your family. Give us a call today at 713-853-0879 or visit us online at www.HardeeInvest-mentGroup.com to learn more about our approach to investing.


 

 This article is provided by H. H. Will Hardee, AWM, a Financial Advisor at RBC Wealth Management’s Houston Center office, and was prepared by or in cooperation with RBC Wealth Management. The information included in this article is not intended to be used as the primary basis for making investment decisions nor should it be construed as a recommendation to buy or sell any specific security. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance. RBC Wealth Management does not provide tax or legal advice. RBC Wealth Management, a division of RBC Capital Markets LLC, Member NYSE/FINRA/SIPC.