The Danger of Investing Emotionally

Investing Emotionally

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We all have an emotional and a rational side of thinking. Investing emotionally can be dangerous. Most often, however, we think that rational side will be able to control the emotional side. Though, take a minute to decide if that’s really the case. 

There’s a  great metaphor that encapsulates this idea perfectly. It’s called “The Elephant and the Rider.” Even looking at that title, which do you think would be in control?

Initially, you might think the rider is in control. The elephant goes where the rider wants it to, and the speed indicated. Though, what happens is when the beast is upset or spooked or scared, really, truly, which one is in control?

The answer is the elephant! The elephant is going to go whichever way it feels is going to keep it safe at that moment.

That’s really how emotions work. Emotions are what guide the next thought, and therefore the next action. In reality, if we can learn how to have them work together, the emotion is not going to get out of control.

The recognition and acknowledgement of the emotion is the first step that is going to help avoid irrational decisions. In essence we say, “Nope! My rational side is in charge.” Be careful though, as this may be a solution temporarily, but those emotions are going to come back bigger and they’re gonna come back even scarier and really take over the entire situation.

You have to keep yourself in balance. A perfect example of this is displayed in parenting. I think we have to understand this: kids have meltdowns sometimes. But, as a parent, when a meltdown occurs there are different ways to react to that child at different times. If it’s after 5:30 at night and they’re having a meltdown, trying to reason with them just isn’t going to work. They’re sleep deprived, they’re hungry, they’re tired. Right then is not the appropriate time. Their emotions are a lot stronger than any rationale.

As grown-ups, we’re just big kids. If I am seeing my 401(k) or my real estate investments tumbling; I become that tired and hungry kid, and I’m scared. Naturally, I’m going to want to say, “I don’t want this fear in my life anymore. Just get me out of it.” 

STOP! Emotionally, it might feel like the right thing to do, but you have to stop and think “No, I’ve gotta be rational about this.” Right now may be the time when I need to just hold or maybe buy into something. Or, do something different that’s completely contrary to what the inside of us is saying to do. Beneath that emotion is really some rationale that is just wanting to be heard and recognized. If we can get past the big flare-up, then we can make a choice that’s going to really serve us, long term.

I think that’s one of the advantages of having someone on your team, a mentor. It’s not their personal money, so even though they do care, they can remove that emotion from that dollar bill. So I think it’s helpful to have that conversation in place. I want to transition this conversation to achieving your financial goals.

Here at Paradigm, we love to help people as much as possible. All you have to do is schedule a free consultation, no string attached.

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