Bull & Baird: Inside Out
Investing should be a relatively straightforward endeavor. Pick an amount of money you want to invest, put it into a diversified portfolio, and let the magic of compounding happen while you go about your life.
Unfortunately, most people struggle to invest like that. It’s not their fault; it’s just how we are built. We aren’t thinking creatures who feel, we are feeling creatures who think.
Emotions can, at times, turn the logical part of our brain off and make us do things with money that are counter to our own odds of success.
Inspired by the movie “Inside Out” I thought it would be fun to look at the kind of emotions people struggle with when they invest. In the movie, an 11-year-old named Riley moves from Minnesota to San Francisco which causes turmoil amongst her emotions: Joy, Fear, Sadness, Disgust, and Anger. She eventually makes peace with her emotions and can accept and enjoy her new life.
Let’s look at a few emotions that happen inside you when you put your hard-earned money into the stock market (and what we might be able to do about it).
Fear and Greed
This pair of particularly challenging emotions are two sides of the same coin and spend their entire lives fighting for your attention.
One day Greed sits in your lap and demands action from you. “We don’t have enough. We need way more and let’s do whatever we can to get it. Maybe we take additional risk here.”
Then out of the blue, Fear shows up and coldly whispers in your ear, “You are in danger. Did you hear what the news said and what that politician wants to do? It’s time for us to do something about it before we lose everything.”
These two will be the primary drivers of your investing brain. You’ll know when one is in charge. Recognizing which one, and controlling it, is crucial.
FOMO
A cousin to Fear, FOMO (Fear of Missing Out) shows up when you become envious of other people getting wealthy and wonder if you need to play their game. FOMO sneaks up on you and asks you to do something to “keep up with the Joneses” and what they are doing. When that happens, I want you to ask yourself, “Do I actually need to be in that and does it make sense for who I am?” Remember, it’s ok that you don’t invest in crypto or art or wine.
Anxiety
We’ve all experienced some form of anxiety in our lives, but investing anxiety is made worse by the world we live in. Anxiety hands you a cup of caffeine and dares you to be calm. If you’re anxious about having money in the stock market, the last thing you want to do is consume endless news or social media. It will just make it worse. Cleanse yourself of noise, focus on trusted sources (like an advisor), and Anxiety will be easier to manage.
Patience
Finally let’s talk about a good emotion, maybe the best emotion when it comes to investing. I can think of nothing that may help you reach goals better than Patience. It simply asks you to take a walk, take a breath, and not make a rash decision. One of the biggest mistakes happen when people try to rush compounding. Patience may even neutralize everything you just read up until this paragraph. It could quite literally be the answer to almost any question about stock market swings. Ride them out, be patient, and reap rewards down the line.
Emotions are not good or bad, they just are what they are. When you invest, it’s important to recognize that managing your emotions is just as important as a financial plan.
If you’re struggling with Fear or another unhelpful emotion, the best thing you can do is sit down with us. Here at Baird, we are always thinking of ways to help our clients. That can often be as simple as talking through your very real emotions. We pride ourselves on expertise and service, but the mere fact that we exist outside of your head might be key to reaching your cherished goals.
The information reflected in this post is an opinion and subject to change. Past performance is not a guarantee of future results. Diversification does not ensure a profit or protect against loss. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances. Speak to your Baird Financial Advisor before making investment decisions.
