Beware – and be aware of – your emotions when managing your money.
In fact, simply considering yourself a rational human being can endanger your personal finances.
To a greater or lesser degree, we all experience psychological factors like intuition, over (or under) confidence, love of excitement/risk, fear, anxiety, various causes of stress in our lives and so on. How low or high these factors rank also makes a difference.
So it’s important to be aware not only of your general mental/emotional inclinations, but also of current issues in your life.
For example, if you are experiencing work, relationship or other stress, this could easily affect your ability to make sound financial decisions.
If you have a financial advisor – whether a full-time planner or somebody at a financial institution who works with you – hopefully that person has helped you identify your general psychological makeup, and also stays in touch with any current issues in your life. Only that way can s/he give you appropriate advice.
Quoted in advisor.ca, Chris Ballanger, director of wealth management at Richardson GMP in Toronto, warns his fellow financial advisors that “client behaviour can seem varied and unpredictable if you don’t properly diagnose their biases.”
He said someone could under-react to small investment losses for a number of years, but when forced out of their comfort zone due to the major decline of an asset, “they’ll tend to overreact and be super conservative.”
Sudden emotional swings are more likely if clients take on too much risk over long periods, he says, noting that taking on too little risk can also have an effect. When people are comfortable with their portfolios, they make more rational reactions and decisions.
If you don’t have a financial advisor, it might be worth investing in a session with a psychologist or even a psychiatrist if you feel your emotional characteristics – or current issues – are harming your ability to manage your money properly.
Or at the very least, do some of your own research to help you understand your emotional makeup and how who you are can affect the decisions about your personal finances.
- Copyright 2018 Mike Grenby. Grenby is a columnist and independent personal financial advisor: [email protected]
