Hope, fear and expectation drive most of the bad feelings we have when things go wrong in our investment world. They are not part of the risk parameters of a share in a business, or a bond, but when the security does not perform as we hoped and expected, we feel pain. Pain leads to fear and fear leads to weak decisions.
Hope, fear and expectation should be part of our long term plans, but they have no place in investment decisions. Steely-eyed objective is the ideal, there.
In a financial plan, hope gives us motivation. Expectation lets us compare and control the process. Fear causes us to understand risk and then do something about it. They do not work when applied to a specific task or product or technique. They are strategic ideas.
When strategic ideas become more than the background, tactical decisions become very difficult. We don’t buy fire insurance based on how we feel, we buy it for what it does. Same thing for designer credit cards. What they do matters. How they look does not. Tactical decisions should be reasoned decisions.
Investments are clearly tactical. Investments are a time machine. They move money from now to the future so it can be used to acquire things we need then. We hope and expect they will be there, vastly larger then and we fear they won’t. None of those feelings represent intrinsic investment values. They are about us.
If we let the “us” side of investing dominate we will do badly. We care about investments, but they don’t care about us. It is not a symbiotic relationship. Not like children who we love and they love us. Investments are aloof.
Being aloof, we can compare them rigorously and not care about their feelings. We can sell them when we are done with them, without remorse. If they under perform, it is because either we made a mistake and we should sell, or because the market is making a mistake and we should buy more. Nothing personal.
If we allow our emotions to be the first response, we are being immature. Good investors are objective and patient. Often skilled too but that is not a serious requirement for most of us. We can buy skill.
When we over use emotion, we became susceptible to hype. Either fear and sell everything or greed and buy everything. Neither fear nor greed are sound principles for investment success. Patience and objectivity work.
If people were patient and objective, you would not see TV shows like Jim Cramer and you would never see ads hyping gold as a defense to global economic chaos. China and Russia have many problems of their own, destroying the US dollar is not an urgent priority for them. When you make business, economics and finance into entertainment expect to see entertaining things that are a little narrow.
Financial literacy is about meaning not about news. If your first response to news is emotion, you aren’t doing it right. Decide if the news matters or if your emotional content is too high.
Humans are not good at objective reality. Consciously manage expectations and you will see less emotion.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
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