Emotional investing: How to make better decisions with your money
You’ve heard this before; the traditional investment advice to “take the emotions out of investing.” But emotions are a natural factor for all our decisions, including the financial ones. And how we feel is an integral part of human physiology. We can’t just “take them out” of our decision process.
If you’ve struggled to remove emotions from your decision making, it’s OK. I have good news: That makes you human—and that’s a very good thing for your money.
Check out Julie’s story.
How a mom checked in on her emotional investing
Julie, a 37-year-old working mother, was feeling immensely stress, as she tried to save for her children’s future education. Despite her husband’s objections, she cut back on household expenses and reduced how much she was contributing to her retirement savings to put more toward her children’s education funds.
This resulted in fights with her husband, and an obsession with the education accounts. And Julie eventually recognized that her feelings about not being able to go to college herself drove her to make financial decisions that weren’t healthy for the entire family. She had to bring awareness to her fear to help her avoid making reactive decisions. Julie learned to soothe her fear by reminding herself that she is a loving mother, and that her own experience as a child will not automatically be the same for her children. She also met with a financial planner to develop a balanced plan.
All these actions help to put some time and space between the emotion and Julie’s emotional responses. She was surprised at how much better she felt just from recognizing, naming, and bringing awareness to the emotion that was driving her to save at all costs.
Money doesn’t have emotions—the people behind the dollars do
Money—think of the bills in your wallet and the dollars in your bank account—is a neutral object. Humans assign value to money in addition to its real-world worth. The emotions we associate with money and investing can be intense. That’s due to the implications money has on our lives, as I wrote in my last column “What is Your Money Story?”
As FP Canada’s 2021 annual survey reveals, money is a top stressor in Canadians’ lives. Perhaps our lack of emotional literacy when it comes to our money is playing a key role. In fact, the avoidance of emotions can also lead to a lack of financial literacy and a reluctance to confront financial matters.
It’s important to recognize and acknowledge emotions as tools to understand the reasons behind our financial choices and why we invest the way we do. This recognition can help us to avoid making reactive decisions. By bringing awareness to present emotions, we can make informed decisions with our logical minds.
But as Julie discovered, emotional responses to money can result in poor financial decisions. For her it was obsessively saving and investing, but for others it could be missed payments or excessive spending.
Emotional cycles of investing
Common emotions linked with investing and finances can include: anxiety, excitement, fear, guilt, joy, relief, satisfaction shame and stress. Let’s look at some of them in more detail. Do any of these emotional cycles speak to you and how you invest?