#129 - How to Avoid the Trap of Emotional Investing, with Dr. Daniel Crosby

Jul 27, 2016

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One of the biggest pitfalls of being an investor is that we tend to make emotional investing decisions. What does that mean? Take a scenario for a moment: the market takes a serious dip and stock prices plummet. The tendency the majority of investors have is to rush to their advisor and try to make changes in order to mitigate the impact of the downterm. But if that investor was guided wisely in the first place their investment strategy should have taken into consideration that downturns would happen. That means there’s no need for an emotional reaction that could cause more harm than good. On this episode of The Retirement Answer Man I’m chatting with Dr. Daniel Crosby about his book, “The Laws of Wealth” and we’ll unpack the best ways to avoid making emotional investment decisions. Behavioral Finance: What the heck is that?

The field of behavioral finance is a fairly new area of study that endeavors to make sense out of the actual behaviors we humans engage in within the financial realm of our lives. And naturally, it includes the issue of emotionally driven decisions we make about our finances. As behavioral finance experts like today’s guest, Dr. Daniel Crosby investigate the things that go into our financial decisions they’re discovering many helpful principles that we can apply to keep ourselves from making decisions that feel like they are in our best interest, but really aren’t. I hope you listen to this episode. There’s lots of insight into the reasons behind our financial decisions in it, and you can make better decisions as a result of applying what you learn. You control what matters most when it comes to your money.

One of Dr. Daniel Crosby’s laws of wealth that can go a long way toward helping you avoid emotional investing decisions is that you are able to control the things that matter the most when it comes to your money. It’s not about the economy and things outside your control, it’s about your end goals - those things you’re aiming at over the long haul. Your decision to create an investment strategy and stick to it day by day even in the face of economic issues that arise, can help you to stay in control over the long haul and actually reach those goals. Dr. Crosby shares a wealth of good information on this episode to help you improve your financial mindset, so be sure you listen. Emotional investing is why you need to remove yourself from the process.

It may sound counterintuitive for me to say that you need to remove yourself from the investing process - but I really mean it. I don’t mean that you should just hand all the decisions over to someone else. What I mean is that once you have determined a process that makes the most sense for your investment goals, you should get out of it and let it run independent of you. That’s where your advisor or financial professional comes in. They are the ones who stick to YOUR plan, at your direction, without you having to think about it. They are also there to caution you when the urge to step in and change things arises. Those are the kinds of emotional decisions you don’t want to make so that you can reach your long term financial goals. You need a financial advisor, but not for the reasons you think.

Most people tend to think that financial advisors are better at predicting the future of the markets or possess specialized knowledge that will help you make better stock picks and investment decisions. While there may be a very small amount of that involved, most of the time it’s not the case. A good financial advisor should be in the loop simply because you need them to be your point of accountability and voice of reason in the event that you want to make an emotional decision based on current conditions. They are there to talk you down from the ledge and keep you on track with the financial plan you’ve established. Think of them like a personal trainer. They are there to keep you going when you want to quit or make a change. You can learn more tips like this on this great episode, so take the time to listen. OUTLINE OF THIS EPISODE OF THE RETIREMENT ANSWER MAN

[0:47] How life is about moving onward and upward.

HOT TOPIC SEGMENT

[4:10] CNN’s “Fear and Greed” index is pretty high right now.

WHAT DOES THAT MEAN? SEGMENT

[6:00] What is “Behavioral finance?”
[7:00] Why the optimism investing is usually based on is not a trustworthy metric.

PRACTICAL PLANNING SEGMENT

[8:53] My introduction of Dr. Daniel Crosby and today’s topic.
[10:03] Why do we make poor decisions when it comes to money?
[12:11] The way things used to be in the investing world and how we need to retrain ourselves.
[15:46] Stepping past the emotional components of investment decisions.
[20:16] Dr. Crosby’s 10 guidelines for managing wealth.
[29:03] Why Dr. Crosby is often asked to say stupid things that he won’t say.
[31:23] What investors should do to invest wisely for the future.

THE HAPPY LAB SEGMENT

[33:32] How we react to things that happen… and how it impacts happiness.
[37:11] How being present during a difficulty impacts the way we react.

TODAY’S SMART SPRINT SEGMENT

[37:53] Write down your investment process - a step by step process you always follow.

RESOURCES MENTIONED IN THIS EPISODE
Contact Roger: http://www.rogerwhitney.com/retirementanswers/
Roger’s retirement learning center: www.RogerWhitney.com/learn
The Retirement Answer Man Facebook page: www.Facebook.com/RetirementAnswerMan
CNN Money Fear & Greed Index
Behavioral finance definition
Dan Crosby’s book “The Laws of Wealth”