My boy William, he is four years old. He’s a great kid, no doubt about it. I am one proud papa.
He’s a red-head. Super cute. Spitting image of me, actually. When I say this, I am not bragging. There is this one picture of me as a toddler, and if you didn’t know any different, you’d swear it was a picture of William.
William has the stereotypical red-head’s temper, though. He can fly off the handle pretty quick. Did I mention that he is the spitting image of me?
On Friday it was my turn to be enraged. Damn utility companies, I’m telling you. Every 45 seconds the recorded message says that my call really is important to them, but if that was really true then why am I still on hold? And if they really did want to thrill me with their service, as they love to claim in their endless cutesy television commercials, then why have these problems been going on for 6 months without getting fixed? So when their snotty customer services manager finally comes on the line after 40 minutes, and starts to lecture me, that was it. The red fury engages, and I come out swinging.
I was so mad that it affected the entire rest of my day. Later I’m in an appointment with one of my clients and I am still seething. So much so that it was hard to concentrate on what it was that he needed. Fortunately this was one of my old hockey buddies, so he understood.
But here’s the thing. My emotions clouded my judgement that day. Not just in my dealings with the utility company, but with everything. It is difficult to make good decisions when your emotions take over.
When it comes to money, emotional decision making is treacherous. But it happens all the time. As a matter of fact, it is very rare when money decisions are made on a purely rational basis. Money decisions are almost always emotional. And emotions can, and often do, cloud your judgement.
Here are some common investing mistakes. They have nothing to do with the investments themselves. These are all about how your emotions affect your perceptions.
Regret theory refers to holding on to a bad investment, rather than admitting a mistake and moving on, in the hopes that the investment will recover in time.
Anchoring means mentally fixing the value of an investment to the price that was paid for it, and judging subsequent price changes relative to the price paid.
Mental accounting is where investors will look at their investments in isolation, rather than as an entire portfolio. This can result in a hodgepodge of poorly diversified investments, and no overall investment plan.
House money effect is a phenomenon where investors view their own capital differently from the profits on their investments. Essentially, the profits are seen as “free money” and more risk is taken with gain on the initial investment.
Herding instinct is extremely common. This refers to buying what everyone else is buying, and selling what everyone else is selling.
Overreaction happens on a daily basis. Investors take some bit of new information and assign it an undue amount of importance.
Your challenge is to take the emotion out of investing. As Warren Buffett says, “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”
The opinions expressed are those of Brad Brain, CFP, R.F.P. CLU, CH.F.C., FCSI. Brad Brain is a Senior Financial Advisor with Manulife Securities Incorporated, in Fort St John, BC. Manulife Securities Incorporated is a Member of the Canadian Investor Protection Fund. Brad Brain can be reached at firstname.lastname@example.org">email@example.com or www.bradbrainfinancial.com.