Humans are emotional creatures.
That’s as true with our money as with anything else, although there’s a whole industry out there that tries to make you think your money decisions are purely logical.
Unless you have a very deliberate process for making your financial decisions, they are driven by emotions.
When markets go down, like they have lately, our emotional responses become even more pronounced.
Now, you may be worried that I’m about to give you another lecture about keeping your emotions out of your finances, just automate everything, be like a robot – but no! I’m actually here to say the exact opposite – you should listen to your emotions when making financial decisions.
Here’s a great example: Maybe you inherited some land or some property. It’s been passed down for generations. You know you should sell it, because it’s far away, or you just don’t want it, or you could use the money. But there’s sentimental value there, and family ties- in many cases, those are valid reasons for waiting awhile, until you feel more ready.
Emotions also factor into our investments.
When markets are going up, or are stable, it’s easy to say you have a high risk tolerance.
But, since markets have become volatile in the past few weeks, a lot of people are getting nervous – and in many cases, that’s very understandable!
I adhere to the efficient markets theory. I don’t believe it’s possible, over the long haul, to outwit the markets – likewise, a stampede into cash can also be very damaging to your future spending power.
But sometimes the advice to “just ride it out” is just smug, and completely lacking in any understanding of your particular situation
Nobody is comfortable in this type of market environment.
But, some investors are able to take a deep breath and keep their focus on the next 10, 20 or 30 years, while others simply don’t have the stomach for these choppy seas.
It’s very fashionable to tell those seasick investors that they should just hold on and wait it out, but I’ve come to believe that’s not necessarily the best advice, in every case.
Now, I’m not advising a panic-stricken stampede to the exits. What I am saying is that re-assessing your risk tolerance is a very valuable exercise, particularly in market conditions like these.
If you find yourself up at night, worried about your accounts, or obsessively checking them throughout the day. That’s usually a sign that you are taking too much risk. The financial magazines and financial TV channels never talk about this, so it’s not really a concept that Americans are familiar with.
But if you can’t take the volatility in your own investments, you’re in the wrong portfolio. And making a change in that case, is worth considering.