09 Dec Your emotions = investing behavior
Hi, it’s your Hendershott Wealth Management team, and today is all about getting into your feelings.
More specifically, we need to talk about how your feelings impact your financial decisions.
Because as you’re well aware, we as human beings can be a bit … irrational, emotionally driven, even downright unpredictable at times when money matters go sideways.
The market takes a nosedive and it’s natural for your pulse to rise a bit, your palms to start sweating, and that’s when you face a choice.
Do you react out of emotion, or do you ‘take a beat’ and let your prefrontal cortex take charge of your emotions again?
Of course, we’d like our emotions to stay buttoned up when money matters start causing stress.
It’s nice to think all of our financial decisions are driven by rational decision-making.
The reality is our emotions and our biases – and yes, we all have biases when it comes to money – can significantly affect our financial decisions.
That is the concept we have a fond affection for called Behavioral Finance: how human behavior drives financial decisions and outcomes.
Today is the kickstart to a brand-new series on Behavioral Finance and helping you know how to keep your emotions in line during even the most stressful money moments.
Start By Aligning Your Values With Your Money Habits
You have a set of core values that guide your everyday behavior, right? Not just ‘do this, don’t do this’, but more “I do this because…” or “I choose not to do that because…”
Those same values likely translate to, if not fully apply to how you make financial decisions.
That’s why identifying our values as it relates to finances is essential.
By outlining your values, you’re more able to focus on what is important to you, which helps you stay on track when making financial decisions.
If you value future security, for example, it makes it easier to contribute to your employer 401(k) plans because that action supports the underlying value (you’ll have resources to retire).
Identifying and understanding your values will lead to more effective long-term decisions that support your financial goals. Click here to complete your own values exercise online.
Beware of Biases When Aligning With Your Money
If you try aligning your values with your money without acknowledging your biases, it will be a greater struggle for you.
Biases, sometimes referred to as assumptions, are irrational beliefs that get in the way of objective perspective.
When we let our beliefs or past experiences keep us from seeing facts and evidence, that’s dangerous.
What’s worse, when our biases are triggered, we can actually ignore evidence that contradicts our beliefs.
By understanding our biases and emotions that can compromise goal-aligned behavior, we can better focus on rational decision-making.
A bias you are likely familiar with as an investor is recency bias. The market went up last month? Then, it’s probably a good time to buy more of that same stock that went up, but that’s recency bias.
Recency bias also happens when we’re easily influenced by recent headlines or news, events, and experiences.
This is commonly seen in the financial markets when news is released and, in reaction, investors buy or sell investments based on the information.
As financial advisors, we know how to spot biases and bad beliefs when talking with our clients.
Whatever the future may hold for the stock market and economy, one of the best investments you may make this new year is in understanding your emotions and behaviors as an investor.
Have you made a recent decision based on breaking news or events?
That may be your bias showing up, but what does the data tell you? What does your written, detailed financial plan tell you about the direction you need to go?
Consider practicing being mindful of where biases can show up in your life and how they may impact you.
There still may be a question ringing in your mind…
“How do I align my money with my values?”
That’s in Part 2 of this series coming out soon. We’ll share helpful steps to identify your money values and how you can live in alignment with those values through every financial decision.
To your prosperity,
Your Hendershott Wealth Management team