Monday, February 16, 2009

Emotional Financial Decisions Invite Trouble

Experts recommend that we avoid shopping without a list. The reason? Our emotions take over and we shop on impulse. The result? We are likely to return with a bunch of stuff we did not really need.

Do you remember those instances you reacted based on your emotions and either regretted or wished you had handled the situation differently? And I bet that was after you calmed down. I’m pretty sure those of you with kids and/or spouses can easily identify with this (of course, it’s a joke). The point I’m trying to make is this: whenever emotions go up, intelligence moves in the opposite direction (down).

Far too often, I witness people making financial decisions solely based on their emotions. Did you know that is one of the surest ways to end up with some form of financial disaster?

The Crystal Ball

Some get their financial advice from sources like news reporters, experts on TV and radio, magazines, friends, and co-workers (hope I didn’t omit anyone). I’m referring to the kind of advice that “show” where or what you should invest in. I must admit that they usually sound very convincing. In addition, they possess the unique ability of making you feel that all of your financial woes will vanish by following those three-minute segments or reading that article (just for the record, I’m not against reading).
May I humbly submit to you that, although, these recommendations (or tips) seem to be directed at EVERYbody, they are not intended for any specific individual. In other words – they are not for you.
Numerous well-intentioned people who come to me are using long-term investment vehicles for short-range goals; and vice versa. They have money earmarked for their retirement and/or kids college held in CD’s (not the one for music, the one you get at the bank or credit union), and money markets. Some have money they intend to use for emergencies invested in individual stocks, mutual funds and annuities. They usually trace their choices back to a news flash, one of those “experts” they saw on TV, or a “divine” article they read (which took over their emotions).
They End Up Not Too Good

I cannot count how many people I have consulted with over the years who needed to withdraw money (to take care of an emergency), and ended up having to pay unnecessary fees and penalties - Usually because they used put-and-keep accounts instead of put-and-take accounts.

On the other hand, there are those who used put-and-take accounts which usually earn low interest (as one would expect) for their put-and-keep money and are very frustrated after several years that “the money isn’t growing” – yeah right, growing!

That’s not all, there are those emotion-based investors who buy a “hot” stock or an “amazing” mutual fund and by the next show, week, or month (depending on how often the show airs or magazine/column publishes) are being shown an entirely different and “more powerful” stock, strategy, or whatever.

This is the dilemma I find REALLY astonishing: I hear “experts” who advised people to invest directly in the stock market; now telling the very same people, to move their already depressed portfolios OUT, and into money markets, bonds or CDs (and make the losses permanent, I might add). Boy, your emotions can really take you on wild rides if you allow them into your financial affairs.

In short, this is what I’m saying:
It takes more than emotions to be financially prudent and successful. So, we need to keep our emotions out; and start making decisions based on facts, reality and common-sense. Then and only then can we avoid getting financially hurt, over and over again.

No comments:

Post a Comment

Chime in with your comments or questions: