The following is an excerpt from our book, THE MILLIONAIRE WITHIN, available on Amazon.
Ask a hundred people whether their emotions influence their financial decisions and all but a few will say “no.” Most people believe they approach investing and money matters with a sound, analytical state of mind. In reality, they approach investing from an emotional perspective.
The Truth About Money and Emotions
The result of your relationship with money should be to find happiness and fulfillment. Success is not measured by getting rich quickly or outperforming the market. Finding your Millionaire Within is a process that helps you discover both financial security and personal fulfillment so you can achieve the life you want to live.
Most people are unaware that their emotions and biases are having an influence on how they view money and investing. Their only clue comes from their past financial mistakes and even then, many people refuse to acknowledge their blunders.
Fear, greed, and other emotions cause people to act impulsively. Frightened investors lose their ability to think clearly. When markets go down, they panic and abandon their investment plan — if they have one — and liquidate their assets at depressed prices. They feel temporarily relieved but soon discover new anxiety: missing out on the market recovery. Investors who flee the market because of a downturn forget that they ultimately have to decide when to reinvest!
Events outside of the financial markets can also trigger inappropriate responses. For example, a previous traumatic experience can make it difficult to make sound financial decisions.
One of our clients, a baby boomer, inherited a large amount of money at an early age. She has a portfolio worth over two million dollars but for the past ten years has kept roughly half of it in a bank savings account, earning a paltry return that doesn’t even keep up with inflation. She is afraid of investing for fear she will make a mistake and lose her money.
We continuously ask her about her interests and what she wants to do with her life and her money, but each time we broach the subject, she responds by asking us about world events so she can decide where best to invest her money. She constantly watches the financial news shows and tries to connect the impact of their conversations with her portfolio. In our attempts to educate her, we discovered there are important behavioral issues that make her afraid to invest her money. But she is paralyzed by this fear. Despite our efforts and assurances, she continues down the same path, leaving much of her money in the bank, its purchasing power eroding every year. While she seems to understand and agree with what we suggest, her past experiences have left her confused and immobilized and she is simply unable to change.
The first step in overcoming harmful behaviors is to admit you’ve made mistakes in the past. Once you identify this pattern — the quirks, idiosyncrasies, biases, and behaviors that caused your financial missteps — you can begin making the adjustments that will help you avoid repeating those mistakes.
Opportunities for Success
You don’t need a financial planning textbook to help you overcome bad money behaviors or relearn the proper way to invest money. You don’t have to spend endless hours studying stock charts, trying to build the optimal portfolio. You don’t have to stay glued to 24/7 financial news reports. The answers may be right in front of you, or more accurately, right inside you. Most importantly, just because you failed in the past is no reason you can’t reach financial security. Adversity can be an opportunity to build success if you understand the behaviors that are causing you to make mistakes.
Investing involves the unknown. It’s not possible to know the future. There is an almost limitless number of factors that influence the direction of the markets. It’s impossible for anyone, no matter how knowledgeable or diligent, to assimilate all these elements into a strategy that accurately and consistently predicts the direction of the stock market.
Fear of the unknown can cause investors to make poor decisions… or to avoid making financial decisions altogether. When people are frightened, their brains seek certainty when there is none to be found. Trying to invest successfully while simultaneously being afraid to invest renders us paralyzed and exhausted. When we do act, we become our own worst enemies, repeatedly making decisions to buy and sell out of fear, afraid of the unknown. Eventually, we make so many mistakes, we flee to the apparent shelter of the nearest investment with “guaranteed” written on it. Even though the investment doesn’t align with our long-term goals, we buy it anyway.
A Diamond in the Rough
Our financial future is determined not by what happens to us but by our perceptions and reactions to what happens to us as shown in the parable below:
A South African farmer grew weary of his arduous daily routine. When he heard tales of other farmers who made great fortunes discovering diamond mines, he sold his farm and spent the rest of his life traveling the African continent in a fruitless search for diamonds. Having found none, depressed and miserable, he threw himself into the ocean and drowned.
Sometime later, while wading across a creek on the property, the man who bought the land from the farmer’s estate saw something shiny beneath the water. Its prism-like reflection caught his eye. He thought it was a crystal and without bothering to examine it further, took the odd-shaped stone home and placed it on the fireplace mantle.
A friend, who was visiting sometime later saw the stone, examined it closely, and was awestruck. “Do you know what you’ve found?” the visitor asked excitedly. It was one of the largest diamonds ever discovered in Africa. It turned out his creek bed was full of them, some smaller in size but equally brilliant.
The first farmer in the story was living on land that contained a fortune in diamonds, yet he sold the property for pennies on the dollar so he could chase a dream elsewhere. Had he taken the time to learn what diamonds look like in their rough state — and searched his property thoroughly— he would have been rich beyond his wildest dreams.
If you think of the farmland as a metaphor for the financial markets and economy, you may, at this very moment, be standing in the middle of your acre of undiscovered diamonds without realizing it.
When a recession occurs, the markets — like the farmer’s land — may appear to be a barren landscape with little promise of treasure. The media may paint a bleak picture of the economy. When more closely examined, however, there may be lucrative financial opportunities available, hidden below the surface, much like the diamonds in the creek. A negative economic environment often disguises the potential for creating significant wealth. We simply have to approach planning for our future in a new and different way. By changing our perception from one of scarcity and fear to one of opportunity and confidence, we discover a way to recognize the value in something that appears valueless to others.
Our brain is wired to seek safety and certainty. When we are fearful it twists our perception, distorts reality, and causes us to make poor decisions, much like the hapless farmer who ignored the great wealth lying literally under his feet.
A client, Claire, recently saw her forty-year-old daughter pass away. Claire’s surviving daughter — ostensibly wishing to take care of her grieving mother — invited Claire to come and live with her. She accepted and, to her surprise, was shocked at how poorly her daughter managed her personal finances. Having just filed for bankruptcy, the daughter needed Claire’s money and credit to secure a home mortgage. Claire assumed legal responsibility by cosigning the mortgage and in addition, ended up raising her grandchildren while living in the house. While she enjoyed spending time with her grandchildren, raising her grandchildren at age 68 was not something she was planning on doing. This was the result of making an emotional decision so quickly after the death of her older daughter.
Final Thoughts on Money and Our Emotions
Unlike Claire and the South African farmer, successful investing requires patience and calm. Avoid making major decisions — financial or otherwise — in an environment of sorrow, fear, anger, or other emotion. Judgment is clouded and the chances of making a wise decision are minimal.
If you enjoyed this content, you can find more of this uplifting and informative approach to redefining your relationship with money in The Millionaire Within.