Today, let’s discuss at topic that isn’t covered too frequently regarding personal finance or investing – Are you emotionally ready to be an investor?
What is being “emotionally ready”?
What do we mean by “emotionally ready” – Well on today’s posting, lets cover this topic in more detail. In the context of investing and personal finance, we are going to define “emotionally ready”. Our definition of emotionally readiness’ includes how you react to two common situations – Either making money or losing money.
Emotional intelligence is also known as “Emotional quotient (EQ) and Emotional intelligence quotient (EIQ), defined as the capability of individuals to recognize their own emotions and those of others, discern between different feelings and label them appropriately, use emotional information to guide thinking and behavior, and manage and/or adjust emotions to adapt to environments or achieve one’s goal(s).” – Wikipedia.
Emotions with Gains – Making Money
The easiest topic to be emotionally ready for is the euphoric or happy feeling when you visit your investment accounts after a day, week, month or year and see a net positive gain in your account – This is enough to add a smile to your face, perhaps some butterflies in your stomach (if the gain is large enough) and pride to your emotional status; seeing positive results for your efforts, research, knowledge and courage to actually place your money in harms way by investing into the markets.
(+) Positive Bias of Gains – A positive bias on this situation would be then to expect that the funds invested were done so with a particular knowledge or special reason and that is exactly why they gained or showed growth – This bias would suggest that your individual efforts had direct impact on the ability for these funds to grow. This can be especially evident if your account shows growth when the overall market is declining.
(-) Negative Bias of Gains – A negative bias on the situation of gaining wealth or seeing an increase in your investments would be the immediate concern that this money is temporary and will immediately decline within the next hour, day, week or month. This is the negative side of making money; the immediate fear of losing these gains.
The next step in the process is reviewing the emotionally reactive states of losing money.
Emotions with Losses – Losing Money
A more difficult topic to address as far as emotional states is the aspect of losing money. No-one likes to place their hard earned cash into an investment, account or venture and come out the other side within a week, month or year with less money than initially started with or nothing at all. Yet, as we will see below, there can be both positive and negative aspects to losses or losing money.
(+) Positive Bias of Losses – Just as there was a negative bias of gains, there is a contrarian view that losses can be positive. For example, if you place a significant sum of money into the stock market and immediately the market reacts with a 30% or greater loss, can this be a positive situation? Certainly, yes if we look at it within a certain framework – This framework would consist of a long term view of the markets with a 20-30 year timeline. If we look at this length of time, we see the markets can recover quickly from negative events.
(-) Negative Bias of Losses – Now we get to the most obvious section of emotional impacts on investing – Losing money and feeling bad about it. This is the most trying and difficult part of investing. Nobody wants to put their hard earned money at risk and actually lose a portion (large or little). Losing money can drive very negative emotions and even lead to depression or worse – If that is the case please seek help – Check CAMH website. As Jack Bogle put it, “Don’t just stand there, do nothing” is sometimes the best policy – Don’t overreact and instead, give yourself some time to assess the situation fully. Additionally, the prospect of losing money also drives people to change their investing strategy and invest differently than their original plan – called loss aversion. This behaviour of investing will hinder your ability to make money over the long term as you are focused on not losing money rather than letting it grow.
Summary – Emotional Intelligence
So what can we take from the positive and negative bias of making money (gains) – Well as described above, we can see immediately that you can either have a positive reaction or negative reaction to a normally positive outcome (i.e. when making money or gains) or a negative outcome (losing money). Based on the situation, the only difference in this situation is the way you personally react to this outcome – How you react is evidence of your personal emotional beliefs or EQ (as described above). Again, losing money can drive very negative emotions and even lead to depression or worse – If that is the case please seek help – Check CAMH website.
Some recent “real world” examples of emotional intelligence were gleaned from Reddit – Based on the Mar 2020 significant drop in market values (+/- 30%) in value over the span of a few weeks.
So now that we know what happens with our emotions, or mindset, when we either make money or lose money, we can focus our efforts on maintaining a positive or neutral outlook on investing – Maintain your gains through dollar cost averaging and don’t sell when losing your money – Don’t lock in your losses. Moreover, as Jack Bogle put it, “Don’t just stand there, do nothing” is sometimes the best policy – Don’t overreact and instead, give yourself some time to assess the situation fully – More to come on this philosophy in the future. A positive example of the worst market timing ever is provided here.
Thank you for reading – See you again in our next post – Stay safe and healthly.
The Lab Manager
Please leave your feedback in the comments if you like our postings, disliked our postings or anything you want to see in the near future.
If you want to support our efforts at http://www.personalfinanceexperiment.com, please leave a comment, hit the like button and subscribe to the blog.
Also, if you like what you read – Please consider supporting us with a coffee – https://www.buymeacoffee.com/PFExperiment