24 Feb THE MOST IMPORTANT JOURNEY IN FINANCE
It’s not a trip to visit the New York or London Stock exchange. It’s not an exclusive meeting with a professional mutual fund or hedge fund manager. It’s not to hear yet another Guru providing yet another forecast or prediction upon the markets.
It is the 12 inch journey that very few individuals are able to successfully travel…the one from the mind to the heart.
Why you might ask? Because every single financial decision is a result of our emotions…not our intelligence or tactics. Now that is not to say that the heart cannot emotionally commit to the right decision in the end, albeit with great practice and focus. You see, Money is a great servant but a horrible master. Financial independence has never resulted from emotionally charged irrational decisions.
A common every day example…. When asking people who choose to shop at Costco or why, they always provide the same types of responses. “Savings!” “It’s cheaper!” “I can buy in bulk!”. Now I love Costco as much as anyone and I think the company has done an amazing job over the past number of years. However, lets face it….It is far from convenient and certainly not the highest possible level of service when compared to their competitors. Yet nonetheless, millions of people flock to Costco stores for their essentials every week. Essentials?! Most people admittedly laugh when they describe this particular quest. They make the trek to their community Costco in order to potentially “save” on the small amount of groceries and possibly a few specialty items on their list.
What is the common result? I went there to pick up “this”, and “that” and ended up spending $600 dollars!!! Why exactly? It’s very simple. Emotion. It is these emotions that fill the cart regardless or the strategy or intention prior to walking through the entrance.
It is very similar to the reaction people take with insignificant market swings. The emotional injection of buying and selling during any market move is what drives volatility. In other words, it is simply the manifesting of the two biggest human emotions of all….FEAR and GREED.
What most people don’t realize is that these emotions are not dangerous in themselves. But rather only when put towards the wrong focus. Greed for love, knowledge, self-care, generosity, etc. are all AMAZING emotional contagions. Fear for safety, for your families’ well being and for their security is a wonderful emotional commitment.
It is when we place the emotional emphasis on the wrong things in our life that we are most vulnerable to disaster and despair.
Consider the following scenarios and how they might impact the outcome under two different frames of thought:
COMMON FEAR: I am afraid of markets and do not want to see any decrease in the value of my savings. Result…Investing in assets that are guaranteed in order to obtain the comfort of certainty and security.
OPPOSING FEAR: I am fearful of outliving my nest egg. I know that investing in assets that provide lower returns are guaranteed to never fulfill my financial goals. Result…investing in assets that have better return potential overtime despite the increased volatility and uncertainty.
COMMON FEAR: I cannot handle my mortgage payment fluctuating. Result…Choosing a fixed rate mortgage to ensure that your payments are both certain and guaranteed not to change despite adjustments to interest rates.
OPPOSITE FEAR: I do not want to pay the bank any more than I have to. Result…Choosing a variable rate mortgage to ensure that you do not pay the bank any type of premium and instead use this extra cash flow to prepay the principal of your mortgage.
COMMON GREED: I want to pick the absolute best stock possible as I am searching for the next best Google, Apple, Netflix, etc. Result… Investing in only securities that you believe can become a “homerun” rather than taking a more disciplined approach.
OPPOSITE GREED: I want to maximize my return on investment by ensuring my assets are consistently growing and therefore taking full advantage of the power of compound interest. Result… Shying away from high-flying volatile stocks and ensuring that you are consistently investing in companies and markets who’s real, actual earnings and cash flows are consistently growing over time.
You see, the direction of FEAR and GREED is all-dependent upon the eye of the beholder. Now I am not saying that one strategy above is better or worse than another necessarily. However, many individuals do not become educated or even aware of which emotions are influencing their investment or financial decisions.
A sound and effective strategy starts with knowledge first. Followed by the thorough understanding of what we should be focused on as an investor. Essentially blocking out all of the irrelevant noise. Because even an elementary level student when asked, would suggest that it is best to buy low and sell high. Or to not “put all your eggs in one basket”, etc, etc, etc.
And yet it so remains, that the most important investment and financial decisions we make are lead NOT by our minds. No matter how certain, No matter how deliberate and no matter how calculated they might seem. But rather by solely by our hearts.
So it is crucial to not only educate our minds, but to completely own our financial plan and strategy so that it can be felt from the heart.