It’s ok to have an emotional attachment to our hard-earned money. What I mean is, in my case, my wife and I have worked very hard to save and invest during our careers. The money we have saved and invested represents stored labor. It represents blood, sweat, and tears. It represents time away from our family and the sacrifices we made. Because of that, I have an emotional attachment to my money. It represents so much more than just numbers in an account. When we invest our money we do so with an eye toward the long term. Our plan is to create enough wealth that we can use it to be a source of retirement income in our later years. So when the capital markets are volatile and our investment dollars go down in value, it’s a difficult thing to endure. It’s easy to lose sight of the long-term goal when you see the fruits of your labor losing value. Sound familiar?
How to reconcile the emotional attachment to our hard earned dollars
In my experience, we all have that emotional attachment to our own money. It’s just human nature, and it’s ok. In fact, I’m sure you’ve worked very hard to save and invest your money. The money you have saved is undoubtedly set aside for some future goal(s). If something like a market downturn were to jeopardize those goals, that would elicit an emotional reaction from most people. I have spoken to many investors that have told me they are able to disregard the emotional impulses that tell them to take action when things seem gloomy. But in practice, when markets are volatile, that emotional impulse it often too great to overcome. Well, you might have guessed, that’s where a trusted financial advisor comes in. A good financial advisor can be an objective voice that helps you make decisions not based on emotion, but rather as part of a purposeful and objective process.
What the data tells us
Research demonstrates the emotional connection very clearly. Every year, research company DALBAR, comes out with it’s ‘Quantitative Analysis of Investor Behavior’. Each year they demonstrate the 20-year return of the U.S. Stock Market (S&P 500) vs. that of equity mutual fund investors. And every year the results show the same thing. The long-term performance of the stock market far outpaces the performance of the average mutual fund investor. In fact, in 2015 the average equity mutual fund investor enjoyed a 20-year compound return of 4.67% while the S&P 500 returned 8.19%. So what does this tell us? It tells us that markets are unpredictable and sometimes volatile and most investors buy and sell at the wrong time. After all, if the ‘average’ investor had just owned an S&P 500 index fund for 20 years, they would have done far better.
The secret to successful investing
The truth is that the secret to successful investing has to do with establishing good habits and behaviors. Things like saving a little money every month, dollar-cost-averaging into your investments, establishing a system of buying low and selling high (rebalancing). When we attempt to time the markets because of our emotional impulses, they usually disrupt our objective process and counteract the good habits and behaviors we have established.
In my experience, there is no way to completely divorce yourself from your emotional connection to your money. One solution is to seek out a good financial advisor that can help you develop a financial plan and manage your investments objectively to help you reach your goals.
Call (816) 607-9188 or contact us to get a trusted, objective look at your investments.
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